Economic backwardness in historicalperspective: a book of essays.

EH.net is owned and operated by the Economic History Association

with the support of other sponsoring organizations.

Economic backwardness Search

HOME ABOUT LOG IN

EH.net Home

EHA Home

Book Reviews

Editors

Previous Newsletter Issues

Reviewers

Browse Library

Copyright

Course Syllabi

Conferences

Databases

Directory

Encyclopedia

MeasuringWorth

In Memoriam

Mailing Lists

Related Sites

Sponsors

Economic History Association

Economic History Society

Business History Conference

The Cliometric Society

Economic and Business History Society

Please read our

Copyright Informationpage for important copyright information.

Comments? Questions? Send email to admin@eh.net

NewslettersTo join the newsletters or submit a posting go to click here.

Economic Backwardness in Historical Perspective: ABook of Essays

Author(s): Gerschenkron, Alexander

Reviewer(s): Fishlow, Albert

Project 2001: Significant Works in Economic History

Alexander Gerschenkron, Economic Backwardness in Historical Perspective: A Book of Essays.

Cambridge, MA: Belknap Press of Harvard University Press, 1962. 456 pp.

Review Essay by Albert Fishlow, International Affairs, Columbia University.

Alexander Gerschenkron: A Latecomer Who Emerged Victorious

Alexander Gerschenkron and his ideas have had, like excellent wine, a remarkable maturing in recent

years. Rare is the sophisticated course in political economy that does not assign his model of relative

backwardness as a required reading. Rarer still is the doctoral student in economic history who remains

uninfluenced by his beguiling hypotheses about the process of historical change within Europe since the

Industrial Revolution.

Gerschenkron’s Background and Early Career

Fortunately, as a consequence of a wonderful biography, The Fly Swatter, by Nicholas Dawidoff, (New

York: Pantheon, 2002) his grandson, we know much more about his life than we had previously. Born in

Odessa in 1904, he died in Cambridge, Massachusetts in 1978. His early life was eventful. He fled the

Bolshevik Revolution with his father in 1920, apparently bound for Paris, but wound up in Vienna

instead. The reason was his father’s immediate success in finding a position running a turbine factory.

There he rapidly learned German, as well as Latin, enabling him to attempt to pass the entrance

examination for secondary school within seven months. His failure, only in Latin and geometry, meant

he was rejected. That challenge was overcome, months later when he easily gained admission. But his

performance at the gymnasium was not going well, until he encountered his future wife, Erica. Suddenly

recommitted to study, he overcame his initial lapse, and graduated with his class.

Thereafter he enrolled in the University of Vienna’s school of Nationalokonomie in 1924. His early

professional career is not recorded in autobiography as was his first 20 years. Indeed, as Dawidoff

summarizes it, “he didn’t much talk about the period from 1924 to 1938 because that was for him a

period of growing frustration and disappointment that culminated in catastrophe.”

The University experience was the first of these disappointments. Whatever the strength in economics

had been with Bohm-Bawerk, Menger and others who had pioneered in the Austrian school, it was not

there in the 1920s. Gerschenkron graduated in 1928, his thesis focusing on Austria’s happy future as a

Marxist democracy. He married, had a child and took a position representing a Belgian motorcycle firm

in Vienna. That was successful, but inadequate. Three years later, he committed himself to politics and

the Social Democrats. That ended in 1934 with the virtual civil war that terminated the party’s existence,

and began the process of decline into Anschluss.

Gerschenkron’s parents left for England at that time. Four years later, he and his family would exit and

join them, and hardly in easy circumstances. But the important novelty, and a decisive point in his

career, was the invitation from Charles Gulick, a Berkeley professor whom he had earlier helped in his

research in Austria, to come to the United States. His acceptance marked the real beginning of his

academic career that subsequently was to flourish over the rest of his life.

But it began equivocally. The finished Gulick book, Austria from Habsburg to Hitler, a two-volume work,

published in 1948 (Berkeley: University of California Press), was brilliant. There is good reason to credit

Gerschenkron’s twelve months of continuous research and writing for that outcome. At least Berkeley

provided a place for him to return, as he did in September 1939. There he was to stay for only five years

before moving on to the Federal Reserve Board. In that interval, beyond continuing his efforts with

Gulick, he also assisted Howard Ellis and Jack Condliffe. And he wrote, in long nights of private work,

what proved to be his single piece of greatest length, Bread and Democracy in Germany, published in

1943 (Berkeley: University of California Press). That book attacked the Junkers for their exploitation of

the rest of the German population, and earned him promotion to the rank of Instructor with the

opportunity to teach courses. It did not earn him any greater special recognition at Berkeley — any more

than Albert Hirschman’s simultaneous efforts there did — and he moved on to Washington in late 1944.

At the Federal Reserve, he established himself as an expert on the Soviet economy. This was a period

when relationships with the Soviet Union became central to the United States, and when there were few

others with his knowledge, interest and immense capacity to immerse himself in any and all information.

He did well, advancing to head of the International Section, until the decisive moment came in 1948:

Harvard offered him a position as a tenured professor, the successor to Abbot Payson Usher. He

accepted, and his university career really began.

There were four parts of that career that are relevant. It all began, appropriately enough, with the Soviet

Union. At Harvard, Gerschenkron established himself at the new Russian Research Center. In a notable

Rand study in 1951, A Dollar Index of Soviet Machinery Output, 1927-28 to 1937, he showed that the

remarkably high rates of growth of Soviet industrial production owed itself to the index number bias: a

Laspeyres index calculated on the basis of 1926-27 weights significantly overstated real expansion. Rapid

Soviet growth was not constructed on the basis of false statistics, but rather, inappropriate technique.

The “Gerschenkron effect,” the difference between calculated Paasche and Laspeyres volume indexes,

commemorates his contribution. Important as the work was at the time, deflating vastly superior Soviet

growth, it was not to be the basis of his subsequent fame.

Gerschenkron’s Economic History: Understanding Economic Backwardness

His present reputation comes instead from his dedication to European economic history. He flourished

as the doyen of economic history in the United States. He influenced a generation of Harvard

economists through his required graduate course in economic history. His erudition and breadth of

knowledge became legendary in its time. Gerschenkron defined an indelible, if unattainable, standard of

scholarship for colleagues and students alike.

Backwardness was at the root of his model of late-comer economic development. His hypothesis first

took form in a 1951 essay entitled “Economic Backwardness in Historical Perspective.” From that brief

25-page contribution to a conference held at Chicago, and later published in Economic Development and

Cultural Change, were to emerge the central ideas that characterized his subsequent academic career.

The essay gave its name to his volume of essays published by Harvard University Press in 1962. It is the

opening chapter of that volume, and a significant reason that it was recently selected as one of the most

influential works of economic history ever published.

The central notion is the positive role of relative economic backwardness in inducing systematic

substitution for supposed prerequisites for industrial growth. State intervention could, and did,

compensate for the inadequate supplies of capital, skilled labor, entrepreneurship and technological

capacity encountered in follower countries seeking to modernize. England, the locus of the Industrial

Revolution, could advance with free market guidance along the lines of Adam Smith. France, beginning

later, would need greater intervention to compensate for its limitations. In Germany, the key innovation

would be the formation of large banks to provide access to needed capital for industrialization, even as

greater Russian backwardness required a larger and more direct state compensatory role.

Gerschenkron’s analysis is conspicuously anti-Marxian. It rejected the English Industrial Revolution as

the normal pattern of industrial development and deprived the original accumulation of capital of its

central force in determining subsequent expansion. It is likewise anti-Rostovian. There were no

equivalent stages of economic growth in all participants. Elements of modernity and backwardness could

survive side by side, and did, in a systematic fashion. Apparently disadvantageous initial conditions of

access to capital could be overcome through new institutional arrangements. Success was indicated by

proportionally more rapid growth in later developers, signaled by a decisive spurt in industrial

expansion.

This model underlay Gerschenkron’s extraordinary research into the specific developmental experiences

of Russia, Germany, France, Italy, Austria and Bulgaria. Those specific cases, in turn, bolstered his

advocacy of a comparative, all-encompassing European structure. “In this fashion,” as he wrote in 1962,

“the industrial history of Europe is conceived as a unified, and yet graduated pattern.”

Over time, and as he read prodigiously and modestly altered the theoretical foundation, the structure of

his approach became ever more specific. I summarize it here in four hypotheses:

(1) Relative backwardness creates a tension between the promise of economic development, as achieved

elsewhere, and the continuity of stagnation. Such a tension takes political form and motivates

institutional innovation, whose product becomes appropriate substitution for the absent preconditions

for growth.

(2) The greater the degree of backwardness, the more intervention is required in the market economy to

channel capital and entrepreneurial leadership to nascent industries. Also, the more coercive and

comprehensive were the measures required to reduce domestic consumption and allow national saving.

(3) The more backward the economy, the more likely were a series of additional characteristics: an

emphasis upon domestic production of producers’ goods rather than consumers’ goods; the use of

capital intensive rather than labor intensive methods of production; emergence of larger scale

production units at the level both of the firm as well as the individual plant; and dependence upon

borrowed, advanced technology rather than use of indigenous techniques.

(4) The more backward the country, the less likely was the agricultural sector to provide a growing

market to industry, and the more dependent was industry upon growing productivity and inter-

industrial sales, for its expansion. Such unbalanced growth was frequently made feasible through state

participation.

The considerable appeal of the Gerschenkron model derives not only from its logical and consistent

ordering of the nineteenth- and early-twentieth-century European experience. That accounted for its

earlier attention, where the conditional nature of its predictions contrasted strongly with its Marxist and

Rostovian alternatives. What has given it greater recent notice has been its broad scale generalization to

the experience of the many late late-comers of the present Third World. His formulation dominates the

stages of growth approach because of its emphasis upon differential development in response to

different initial conditions. There is thus the irony of Walt Rostow’s demise at the hands of Gerschenkron

– does anyone now assign The Stages of Economic Growth? — when Rostow had been the first choice of

Harvard to succeed Usher in 1948.

In Gerschenkron’s own hands, his propositions afforded an opportunity to blend ideology, institutions

and the historical experience of industrialization, especially in the case of his native Russia, in a dazzling

fashion. For others, his approach has often proved a useful starting point for the historical discussion of

other parts of the world, such as Henry Rosovsky did with Japan, and others, elsewhere. Always,

application of the backwardness approach requires close attention to detail, as well as a quantitative

emphasis.

Responses to Gerschenkron’s Thesis

The model is, of course, not without its limitations and its critics. History, even of Europe alone, does not

in every detail bear easily the weight of such a grand design. In other parts of the world, and in a later

time period, larger amendments are frequently required, and sometimes forgotten by current advocates.

And somewhat surprisingly, in view of Gerschenkron’s own path-breaking essay in political economy,

Bread and Democracy in Germany, there is too little special attention to the domestic classes and

interests seeking to control the interventionist state. Backwardness can too easily become an alternative,

technologically rooted explanation that distracts attention from the state and the politics surrounding it,

rather than focusing upon its opportunities and constraints. Ultimately, as well, there are the many

developmental failures — rather than only the successes — that now loom larger and attract attention.

While he did explicitly treat Austria as a failed case, it was not a central part of his theoretical structure.

Moreover, important current issues like globalization, the central role of international trade, and

education are less significant through much of the nineteenth century in Europe.

Still, the concept of relative backwardness, and Gerschenkron’s always insightful and rich elaborations in

so many national contexts, represent a brilliant and original approach to economic history that has been

perhaps unequalled in the twentieth century. And more recently, with the rise of political economy as a

field, his work is widely assigned as required reading. A quick measure of his current influence is the

almost 2000 Google references that turn up with the entry of his name.

Gerschenkron’s Enduring Influence

His third great contribution came through his students. Dawidoff’s The Fly Swatter, provides a whole

chapter, and more, focused on his role. First, in the 1950s came the students who worked upon the

Soviet Union. Then, as his interests concentrated upon economic history, came his direction of the Ford

Foundation supported Economic History Workshop at Harvard in the late 1950’s and 1960s. His seminar

then, and the availability of fellowship support, attracted several Harvard students, and even some from

neighboring MIT, to work in the field. Always, too, there were an impressive group of visitors to

Cambridge who were invited to speak to the seminar, but never had permanence in its regular activities.

His recruitment techniques were subtle but effective. Economics 233, the course in economic history

required of all graduate students, assigned a paper as well as a final examination. That provided a chance

for him to assess each student early on through a brief visit to his office. Entry therein was a special

occasion: filled as it was with books, journals, documents, maps, etc., it embodied scholarship with a

capital S. Few who were recruited could desist, regardless of initial inclinations that were not directed to

economic history.

The course was just the introduction. For those who went on in the field more seriously, the regular

evening seminar became the focus. There ideas for dissertations were discussed and quantitative

techniques evaluated. It was just as the computer was evolving and econometrics was undergoing rapid

advance. Gerschenkron himself frequently knew little of the economic theory or statistical techniques

proposed. He usually limited himself to a final evaluative comment, and one that either justified further

research or implicitly suggested that another topic might be a better eventual choice. That judgment was

informed by the previous discussion as well as his sense of the student’s intellectual capacity.

Gerschenkron had extremely good judgment or very good luck, or perhaps a combination of both. For

the small crop of students who wrote with him over more than a decade went on to leadership as the

field of economic history was just changing back from an historical emphasis to an economic one.

Cliometrics was the new terminology. Leading universities absorbed his students, who almost always

have had productive subsequent careers. Additionally, one can record that a goodly number of them

have also attained presidency of the Economic History Association.

It was not his direct dissertation supervision that was responsible. He provided no topic, no suggestion of

sources, no regular guidance, no timetable for conclusion. Most of the students chose subject matter far

from continental Europe. What these persons gained was proximity to a stellar intellect, and close

association with each other as they pursued their research. They also obtained a father figure whom they

desperately sought to imitate in their own scholarship and subsequent teaching. Those who survived that

complex relationship almost always emerged with deep affection and fond memories, even if the process

was far from linear and continuous.

By the mid-1960s, ten of his students, both in Soviet economics and economic history, prepared a

Festschrift in his honor. The book, Industrialization in Two Systems, was organized and edited by Henry

Rosovsky, and published in 1966 (New York: Wiley). Many of the essays are still worth reading. But the

dedication, from the Pirke Avot, states their strong feelings perhaps best of all: “The day is short, and the

work is great, and the laborers are sluggish, and the reward is much, and the Master is urgent.”

A fourth and last relevant observation relates to his general intellect. He was an extraordinary scholar

(and person), as his biography fully details. He was an exceptional reader, of good books and bad. In his

own writings, his references were varied, and consciously intended to impress: “There was almost always

a little Latin, unless there was a little Greek or a little German or a little Russian or a little French or a little

Italian; …” Nor did he exclusively write on economic history. There were his book reviews and other

essays, including the one joint work — with his wife — on the adequacy of the diverse translations of

Hamlet’s quatrain to Ophelia in sixteen different languages. There were his regular lunchtime

performances at the Faculty Club and Eliot House and his interactions with other Harvard scholars. His

talents were notable and appreciated: what other economist would have been offered chairs in Italian

literature and Slavic studies?

Not surprisingly, upon reaching the mandatory retirement age of 65 in 1969, he was offered a further five

years. But those years were not a happy terminus to his long stay at Harvard. The war in Vietnam, and

the student reaction, imposed a large cost, as it did to many others who had fled Europe in the 1930s.

Long-standing friendships were broken, as with John Kenneth Galbraith. The end of the economic

history requirement in 1973 was another major disappointment. Perhaps the greatest one, however, was

his inability to publish the great work, the big book that would summarize his brilliant insights into the

process of European industrial change, the book that could and would influence political scientists and

economists for generations to come. Despite this lapse, Gerschenkron’s influence has subsequently

blossomed. The collection of essays under review, which opens with the backwardness thesis and closes

with appendices on industrial development in Italy and Bulgaria (with reflections on Soviet literature

along the way) — has achieved a hallowed acceptance.

Recent Developments and Gerschenkron’s Ideas

The current surge of interest in political economy has brought a second wave of increasing interest in

Gerschenkron’s insights. As the contemporary world continues to confront the problem of inadequate

development, particularly over the last twenty years in Latin America and Africa, that special magic of

nineteenth century backwardness stimulates greater appeal, and greater hope. So does the case of

success in Asia.

The rapid pace of development in East Asia, for example, has inspired a whole set of major works over

the last fifteen years, seeking to ascertain how a region, apparently condemned to continuing stagnation

by religion, language and tradition, could spurt ahead in the 1970s and subsequent periods. Even the

recent pause, requiring massive assistance from the IMF and extensive domestic restructuring, has come

off with barely a temporary decline.

After all the discussion of major changes supposedly required in the system of international financial

flows in the past few years, little has, in fact, happened. The market has continued to distribute

something like $1 trillion, in both capital flows as well as foreign investment, throughout the world.

Market criteria have dominated, as even a casual look at real interest rates within developing countries

suggests. This has not much altered the pattern of development. The countries of Asia have managed to

regain their position of primacy in global growth rates.

With AIDS spreading rapidly throughout Africa, with malaria and other diseases recurring, with

environmental degradation threatening, with a demographic transition that will begin to exert the

pressure of an aging population, there is no lack of additional new problems that are pressing. On the

other side is the reality of declining international assistance from the already developed North.

Failure of economic development to become a global process, as it appeared to do in the 1960s, and for

broad convergence in per capita income levels to occur, now constitutes a major intellectual and

practical challenge. Should one opt against the pressures of increasing globalization, and return to the

industrial protection and import substitution of the past? Should one seek to enhance the role of central

direction and decision at the expense of decentralization and private determination? Should one attack

the inequality of income and poverty by imposing greater burdens upon the domestic rich and foreign

investors? Should one engage in significant land reform? Should one renationalize after the extraordinary

privatization that has occurred over the last decade or so?

These new issues are not ones that Gerschenkron explicitly raised. But they are implicit in his efforts to

pose the advantages of backwardness. What was an advantage in one historical setting can readily

become a disadvantage in another. But the very effort to construct an explicit, and testable, model is

what differentiates him from his contemporaries. Shura, as he was better known by those very close to

him, is guaranteed a place in the pantheon of economic history.

Albert Fishlow is Professor of International Affairs and Director, Institute of Latin American Studies at

Columbia University. He has served as Deputy Assistant Secretary of State for Inter-American Affairs;

Dean of International and Area Studies at UC-Berkeley; Paul A. Volcker Senior Fellow for International

Economics at the Council of Foreign Affairs; and coeditor of Journal of Development Economics, among

numerous other positions.

Subject(s): Economywide Country Studies and Comparative History

Geographic Area(s): General, International, or Comparative

Time Period(s): 20th Century: WWII and post-WWII

Slavery’s Capitalism: A New History of AmericanEconomic Development

Editor(s): Beckert, Sven

Rockman, Seth

Reviewer(s): Wright, Gavin

Published by EH.Net (March 2017)

Sven Beckert and Seth Rockman, editors, Slavery’s Capitalism: A New History of American Economic

Development. Philadelphia: University of Pennsylvania Press, 2016. viii + 406 pp. $40 (cloth), ISBN: 978-0-

8122-4841-8.

Reviewed for EH.Net by Gavin Wright, Department of Economics, Stanford University.

In case any economic historian has been asleep or on Mars for the past three years, you may want to

know that the economics-of-slavery culture wars have broken out again. Though only a pale shadow of

the dust-up we had back in the 1970s, the aggressive assertions of the “new history of capitalism”

regarding the centrality of slavery for U.S. economic development, and critiques of this work by

economic historians, have generated much commotion in academic circles, including numerous review

articles and a lengthy survey in The Chronicle of Higher Education (December 8, 2016). The present

volume is a manifesto of sorts for the slavery wing of the NHC insurgency, originating in a conference at

Brown University (co-sponsored by Harvard) in 2011.

The claims of the editors for the new history of capitalism and slavery are not modest. The opening

sentence of the Introduction reads: “During the eighty years between the American Revolution and the

Civil War, slavery was indispensable to the economic development of the United States” (p. 1). They

acknowledge that “the argument is more easily asserted than substantiated” (p. 3), but this cautionary

note does not deter them from announcing the “impossibility of understanding the nation’s spectacular

pattern of economic development without situating slavery front and center” (p. 27). The publisher’s

summary of the book (presumably approved by the editors) deploys even more extravagant language,

declaring that the book “identifies slavery as the primary force driving key innovations in

entrepreneurship, finance, accounting, management, and political economy,” “the originating catalyst

for the Industrial Revolution and modern capitalism” (University of Pennsylvania Press web site).

Having thus allowed the editors to dig their own rhetorical graves, let me urge economic history readers

not to overreact to the bluster and bombast. After decades of untouchability, the new interest in

economic aspects of slavery on the part of younger scholars is a good thing, an opportunity for cross-

disciplinary learning and cooperation. Scholars from different disciplines will inevitably differ in their

framing of the issues, their choice of language and styles of historical writing, but there is no deep reason

here for an ideological Great Divergence regarding slavery. Suffice it to say here that virtually none of

the claims in the preceding paragraph are supported in any substantial way by the research presented in

the volume. But most of the writers do not seem committed to this agenda anyway. It is unfortunate

that historians pursuing original inquiries on slavery-related topics have been persuaded to present their

work as apparent disciples of a militant insurgency. But there is no intellectual gain in recasting this

historical project as a team sport.

Putting the editors’ introduction aside, only the chapter by Edward E. Baptist stands out for tendentious

claims in support of a preconceived agenda. Here Baptist is somewhat defensive, his book having been

roundly criticized by Alan Olmstead and Paul Rhode for inventing the term “pushing system,” neglecting

improvements in cotton varieties, and misusing historical sources, including the WPA slave narratives.

But this does not stop Baptist from adding a few more half-baked morsels to his mélange. Among many

candidates, most irksome to this reviewer is this one: “The three million white people in the cotton states

were per capita the richest people in the United States, and probably the richest group of people of that

size in the world” (p. 36). A footnote cites James Huston’s Calculating the Value of the Union (the whole

book) and p. 87 of Robert Fogel’s Without Consent or Contract. The statement gets the population

wrong, conflates wealth with income, ignores the widening gap between slave owners and non-owners,

and aggregates real and slave property. To be sure, the value of slave property was very real to the

owners. The essential point is that the South was the wealthiest region in the nation when slave values are

included, but the poorest when they are not. (See Gavin Wright, Slavery and American Economic

Development, p. 60.) This deficiency, coupled with the failure to invest in education and infrastructure —

not the purported decline in plantation productivity (p. 43) — explains the emergence of southern

economic backwardness when slavery was abolished.

Because the Baptist debate is ongoing, it will not be pursued further here. Following my own injunction

to accentuate the positive, let me recommend the chapters by Caitlin Rosenthal on accounting practices

on slave plantations; by Daina Ramey Berry on attitudes toward life and death in the shadow of slave

markets; by Calvin Schermerhorn on the entwining of financial and mercantile interests in the coastwise

slave trade; by Craig Steven Wilder on the role of slavery in financing Catholic colleges in the Age of

Revolution; by Alfred L. Brophy on “proslavery instrumentalism” in legal thought; and by Andrew

Shankman on Matthew Carey’s embrace of slavery in formulating his Whig political economy for the

nation. Independent scholar Bonnie Martin has performed extraordinary labor compiling records on

slave mortgages from county deed books, and here she adds 10,000 additional loans to her previous

collection (Journal of Southern History, November 2010). One hopes that these data will at some point

be put to use by economic historians. Here, unfortunately, Martin struggles to draw interesting

conclusions from her evidence. She suggests that “an image of capitalistic sophistication … runs counter

to the traditional assumptions about the economy of the South,” (p. 119) appending a footnote including

no less than three books by the current reviewer. Since none of these books advance any claims about

the “lack of sophistication in the southern economy” — quite the contrary — one can only conclude that

the author is grasping for straws.

Let me call particular attention to the chapters by Daniel B. Rood and by John Majewski, which should

be read conjointly. Rood writes about the slave-using wheat farms of Virginia, building on his earlier

article on that topic (Journal of American History, June 2014). The particular focus here is the invention

of the reaper by Cyrus McCormick on his father’s wheat farm in the Shenandoah Valley. The reaper’s

Virginia origins are well-known to economic historians, but Rood asks us to see this “quintessentially

American machine as a Creole artifact, a tropical technology, and, more than anything, a product of

Atlantic slavery” (p. 87). According to Rood’s account, pressure to mechanize came from a premium

on speed in marketing, which arose as planters sought the patronage of new mills in Richmond,

producing flour for the Brazilian market. Rood is persuasive in describing the “pools of expertise and

the plantation laboratory” (p. 94) in Virginia, including the contribution of skilled slaves. (Oddly, there is

no citation to Charles Dew’s Bond of Iron [1994], which discusses Virginia’s skilled slave machinists in

considerable detail.) What he does not come to grips with is the fact that the reaper did not diffuse

rapidly in Virginia, which McCormick largely abandoned after 1845, moving into what he knew to be a

more promising market for mechanical implements in the Midwest. Obed Hussey, McCormick’s arch-

rival in mechanical reaping, had been there all along.

Majewski, the only card-carrying economic historian in the group, also shows the compatibility between

slavery and a “thriving, diversified economy,” (p. 279) focusing on what he calls the Limestone South, a

fertile alfisol area encompassing Kentucky’s Bluegrass region, Virginia’s Shenandoah Valley, and

Tennessee’s Nashville Basin. According to Majewski, the decisive feature differentiating the Limestone

South from the free states was the absence of support for public schools, a consequence of slaveholders’

stranglehold on state politics. Majewski argues that this stark difference in access to educational

opportunity helps to explain northern opposition to the expansion of slavery. He quotes Abraham

Lincoln: “Free Labor insists on universal education,” but evidently the first step toward this goal was to

keep large slaveholders out.

The book’s broad characterization of slave owners as calculating, acquisitive, financially sophisticated

and linked to international networks, is not one that economic historians will be inclined to object to, in

large part because we have been arguing along similar lines for decades. The striking divergence

between slave and free states, on the other hand, in the geography of settlement, population growth,

urbanization, schooling, and politics (a partial list) cries out for more intensive study by historians of all

types. With only occasional exceptions, that major topic is largely missing from the volume under

review. One thing seems certain: calling one region or the other “capitalist” will not contribute much to

historical understanding.

Gavin Wright is William Robertson Coe Professor of American Economic History Emeritus at Stanford

University. His book, Sharing the Prize: The Economics of the Civil Rights Revolution in the American

South, will be issued in paperback by Harvard University Press in the Fall of 2017.

Copyright (c) 2017 by EH.Net. All rights reserved. This work may be copied for non-profit educational

uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net

Administrator (administrator@eh.net). Published by EH.Net (March 2017). All EH.Net reviews are

archived at http://eh.net/book-reviews/

Subject(s): Servitude and Slavery

Geographic Area(s): North America

Time Period(s): 19th Century

The Economic History of Mexico

The Economic History of Mexico

Richard Salvucci, Trinity University

Preface[1]

This article is a brief interpretive survey of some of the major features of the economic history of Mexico

from pre-conquest to the present. I begin with the pre-capitalist economy of Mesoamerica. The colonial

period is divided into the Habsburg and Bourbon regimes, although the focus is not really political: the

emphasis is instead on the consequences of demographic and fiscal changes that colonialism brought.

Next I analyze the economic impact of independence and its accompanying conflict. A tentative effort to

reconstruct secular patterns of growth in the nineteenth century follows, as well as an account of the

effects of foreign intervention, war, and the so-called “dictatorship” of Porfirio Diaz. I then examine the

economic consequences of the Mexican Revolution down through the presidency of Lázaro Cárdenas,

before considering the effects of the Great Depression and World War II. This is followed by an

examination of the so-called Mexican Miracle, the period of import-substitution industrialization after

World War II. The end of the “miracle” and the rise of economic instability in the 1970s and 1980s are

discussed in some detail. I conclude with structural reforms in the 1990s, the North American Free Trade

Agreement (NAFTA), and slow growth in Mexico since then. It is impossible to be comprehensive and

the references appearing in the citations are highly selective and biased (where possible) in favor of

English-language works, although Spanish is a must for getting beyond the basics. This is especially true

in economic history, where some of the most innovative and revisionist work is being done, as it should

be, by historians and economists in Mexico.[2]

Where (and What) is Mexico?

For most of its long history, Mexico’s boundaries have been shifting, albeit broadly stable. Colonial

Mexico basically stretched from Guatemala, across what is now California and the Southwestern United

States, and vaguely into the Pacific Northwest. There matters stood for more than three centuries[3].

The big shock came at the end of the War of 1847 (“the Mexican-American War” in U.S. history). The

Treaty of Guadalupe Hidalgo (1848) ended the war, but in so doing, ceded half of Mexico’s former

territory to the United States—recall Texas had been lost in 1836. The northern boundary now ran on a

line beginning with the Rio Grande to El Paso, and thence more or less west to the Pacific Ocean south of

San Diego. With one major adjustment in 1853 (the Gadsden Purchase or Treaty of the Mesilla) and

minor ones thereafter, because of the shifting of the Rio Grande, there it has remained.

Prior to the arrival of the Europeans, Mexico was a congeries of ethnic and city states whose own

boundaries were unstable. Prior to the emergence of the most powerful of these states in the fifteenth

century, the so-called Triple Alliance (popularly “Aztec Empire”), Mesoamerica consisted of cultural

regions determined by political elites and spheres of influence that were dominated by large ceremonial

centers such as La Venta, Teotihuacan, and Tula.

While such regions may have been dominant at different times, they were never “economically”

independent of one another. At Teotihuacan, there were living quarters given over to Olmec residents

from the Veracruz region, presumably merchants. Mesoamerica was connected, if not unified, by an

ongoing trade in luxury goods and valuable stones such as jade, turquoise and precious feathers. This

was not, however, trade driven primarily by factor endowments and relative costs. Climate and resource

endowments did differ significantly over the widely diverse regions and microclimates of Mesoamerica.

Yet trade was also political and ritualized in religious belief. For example, calling the shipment of

turquoise from the (U.S.) Southwest to Central Mexico the outcome of market activity is an

anachronism. In the very long run, such prehistorical exchange facilitated the later emergence of trade

routes, roads, and more technologically advanced forms of transport. But arbitrage does not appear to

have figured importantly in it.[4]

In sum, what we call “Mexico” in a modern sense is not of much use to the economic historian with an

interest in the country before 1870, which is to say, the great bulk of its history. In these years, specificity

of time and place, sometimes reaching to the village level, is an indispensable prerequisite for meaningful

discussion. At the very least, it is usually advisable to be aware of substantial regional differences which

reflect the ethnic and linguistic diversity of the country both before and after the arrival of the

Europeans. There are fully ten language families in Mexico, and two of them, Nahuatl and Quiché,

number over a million speakers each.[5]

Trade and Tribute before the Europeans

In the codices or deerskin folded paintings the Europeans examined (or actually commissioned), they

soon became aware of a prominent form of Mesoamerican economic activity: tribute, or taxation in

kind, or even labor services. In the absence of anything that served as money, tribute was forced

exchange. Tribute has been interpreted as a means of redistribution in a nonmonetary economy. Social

and political units formed a basis for assessment, and the goods collected included maize, beans, chile

and cotton cloth. It was through the tribute the indigenous “empires” mobilized labor and resources.

There is little or no evidence for the existence of labor or land markets to do so, for these were a

European import, although marketplaces for goods existed in profusion.

To an extent, the preconquest reliance on barter economies and the absence of money largely accounts

for the ubiquity of tribute. The absence of money is much more difficult to explain and was surely an

obstacle to the growth of productivity in the indigenous economies.

The tribute was a near-universal attribute of Mesoamerican ceremonial centers and political empires.

The city of Teotihuacan (ca. 600 CE, with a population of 125,000 or more) in central Mexico depended

on tribute to support an upper stratum of priests and nobles while the tributary population itself lived at

subsistence. Tlatelolco (ca 1520, with a population ranging from 50 to 100 thousand) drew maize, cotton,

cacao, beans and precious feathers from a wide swath of territory that broadly extended from the Pacific

to Gulf coasts that supported an upper stratum of priests, warriors, nobles, and merchants. It was this

urban complex that sat atop the lagoons that filled the Valley of Mexico that so awed the arriving

conquerors.

While the characterization of tribute as both a corvée and a tax in kind to support nonproductive

populations is surely correct, its persistence in altered (i.e., monetized) form under colonial rule does

suggest an important question. The tributary area of the Mexica (“Aztec” is a political term, not an ethnic

one) broadly comprised a Pacific slope, a central valley, and a Gulf slope. These embrace a wide range of

geographic features ranging from rugged volcanic highlands (and even higher snow-capped volcanoes)

to marshy, humid coastal plains. Even today, travel through these regions is challenging. Lacking both

the wheel and draught animals, the indigenous peoples relied on human transport, or, where possible,

waterborne exchange. However we measure the costs of transportation, they were high. In the colonial

period, they typically circumscribed the subsistence radius of markets to 25 to 35 miles. Under the

circumstances, it is not easy to imagine that voluntary exchange, particularly between the coastal

lowlands and the temperate to cold highlands and mountains, would be profitable for all but the most

highly valued goods. In some parts of Mexico–as in the Andean region—linkages of family and kinship

bound different regions together in a cult of reciprocal economic obligations. Yet absent such

connections, it is not hard to imagine, for example, transporting woven cottons from the coastal

lowlands to the population centers of the highlands could become a political obligation rather than a

matter of profitable, voluntary exchange. The relatively ambiguous role of markets in both labor and

goods that persisted into the nineteenth century may perhaps derive from just this combination of

climatic and geographical characteristics. It is what made voluntary exchange under capitalistic markets

such a puzzlingly problematic answer to the ordinary demands of economic activity.

[See the relief map below for the principal physical features of Mexico.]

http://www.igeograf.unam.mx/sigg/publicaciones/atlas/anm-2007/muestra_mapa.php?

cual_mapa=MG_I_1.jpg

[See the political map below for Mexican states and state capitals.]

Used by permission of the University of Texas Libraries, The University of Texas at Austin.

“New Spain” or Colonial Mexico: The First Phase

Mexico was established by military conquest and civil war. In the process, a civilization with its own

institutions and complex culture was profoundly modified and altered, if not precisely destroyed, by the

European invaders. The catastrophic elements of conquest, including the sharp decline of the existing

indigenous population, from perhaps 25 million to fewer than a million within a century due to warfare,

disease, social disorganization and the imposition of demands for labor and resources should

nevertheless not preclude some assessment, however tentative, of its economic level in 1519, when the

Europeans arrived.[6]

Recent thinking suggests that Spain was far from poor when it began its overseas expansion. If this were

so, the implications of the Europeans’ reactions to what they found on the mainland of Mexico (not,

significantly in the Caribbean, and, especially, in Cuba, where they were first established) is important.

We have several accounts of the conquest of Mexico by the European participants, of which Bernal Díaz

del Castillo is the best known, but not the only one. The reaction of the Europeans was almost uniformly

astonishment by the apparent material wealth of Tenochtitlan. The public buildings, spacious residences

of the temple precinct, the causeways linking the island to the shore, and the fantastic array of goods

available in the marketplace evoked comparisons to Venice, Constantinople, and other wealthy centers

of European civilization. While it is true that this was a view of the indigenous elite, the beneficiaries of

the wealth accumulated from numerous tributaries, it hardly suggests anything other than a kind of

storied opulence. Of course, the peasant commoners lived at subsistence and enjoyed no such privileges,

but then so did the peasants of the society from which Bernal Díaz, Cortés, Pedro de Alvarado and the

other conquerors were drawn. It is hard to imagine that the average standard of living in Mexico was any

lower than that of the Iberian Peninsula. The conquerors remarked on the physical size and apparent

robust health of the people whom they met, and from this, scholars such as Woodrow Borah and

Sherburne Cook concluded that the physical size of the Europeans and the Mexicans was about the

same. Borah and Cook surmised that caloric intake per individual in Central Mexico was around 1,900

calories per day, which certainly seems comparable to European levels.[7]

Certainly, the technological differences with Europe hampered commercial exchange, such as the

absence of the wheel for transportation, metallurgy that did not include iron, and the exclusive reliance

on pictographic writing systems. Yet by the same token, Mesoamerican agricultural technology was

richly diverse and especially oriented toward labor-intensive techniques, well suited to pre-conquest

Mexico’s factor endowments. As Gene Wilken points out, Bernardo de Sahagún explained in his General

History of the Things of New Spain that the Nahua farmer recognized two dozen soil types related to

origin, source, color, texture, smell, consistency and organic content. They were expert at soil

management.[8] So it is possible not only to misspecify, but to mistake the technological “backwardness”

of Mesoamerica relative to Europe, and historians routinely have.

The essentially political and clan-based nature of economic activity made the distribution of output

somewhat different from standard neoclassical models. Although no one seriously maintains that

indigenous civilization did not include private property and, in fact, property rights in humans, the

distribution of product tended to emphasize average rather than marginal product. If responsibility for

tribute was collective, it is logical to suppose that there was some element of redistribution and collective

claim on output by the basic social groups of indigenous society, the clans or calpulli.[9] Whatever the

case, it seems clear that viewing indigenous society and economy as strained by population growth to the

point of collapse, as the so-called “Berkeley school” did in the 1950s, is no longer tenable. It is more likely

that the tensions exploited by the Europeans to divide and conquer their native hosts and so erect a

colonial state on pre-existing native entities were mainly political rather than socioeconomic. It was

through the assistance of native allies such as the Tlaxcalans, as well as with the help of previously

unknown diseases such as smallpox that ravaged the indigenous peoples, that the Europeans were able

to place a weakened Tenochtitlan under siege and finally defeat it.

Colonialism and Economic Adjustment to Population Decline

With the subjection first of Tenochtitlan and Tlatelolco and then of other polities and peoples, a process

that would ultimately stretch well into the nineteenth century and was never really completed, the

Europeans turned their attention to making colonialism pay. The process had several components: the

modification or introduction of institutions of rule and appropriation; the introduction of new flora and

fauna that could be turned to economic use; the reorientation of a previously autarkic and precapitalist

economy to the demands of trade and commercial exploitation; and the implementation of European

fiscal sovereignty. These processes were complex, required much time, and were, in many cases, only

partly successful. There is considerable speculation regarding how long it took before Spain (arguably a

relevant term by the mid-sixteenth century) made colonialism pay. The best we can do is present a

schematic view of what occurred. Regional variations were enormous: a “typical” outcome or institution

of colonialism may well have been an outcome visible in central Mexico. Moreover, all generalizations

are fragile, rest on limited quantitative evidence, and will no doubt be substantially modified eventually.

The message is simple: proceed with caution.

The Europeans did not seek to take Mesoamerica as a tabula rasa. In some ways, they would have been

happy to simply become the latest in a long line of ruling dynasties established by decapitating native

elites and assuming control. The initial demand of the conquerors for access to native labor in the so-

called encomienda was precisely that, with the actual task of governing be left to the surviving and

collaborating elite: the principle of “indirect rule.”[10] There were two problems with this strategy: the

natives resisted and the natives died. They died in such large numbers as to make the original strategy

impracticable.

The number of people who lived in Mesoamerica has long been a subject of controversy, but there is no

point in spelling it out once again. The numbers are unknowable and, in an economic sense, not really

important. The population of Tenochtitlan has been variously estimated between 50 and 200 thousand

individuals, depending on the instruments of estimation. As previously mentioned, some estimates of

the Central Mexican population range as high as 25 million on the eve of the European conquest, and

virtually no serious student accepts the small population estimates based on the work of Angel

Rosenblatt. The point is that labor was abundant relative to land, and that the small surpluses of a large

tributary population must have supported the opulent elite that Bernal Díaz and his companions

described.

By 1620, or thereabouts, the indigenous population had fallen to less than a million according to Cook

and Borah. This is not just the quantitative speculation of modern historical demographers.

Contemporaries such as Jerónimo de Mendieta in his Historia eclesiástica Indiana (1596) spoke of towns

formerly densely populated now witness to “the palaces of those former Lords ruined or on the verge of.

The homes of the commoners mostly empty, roads and streets deserted, churches empty on feast days,

the few Indians who populate the towns in Spanish farms and factories.” Mendieta was an eyewitness to

the catastrophic toll that European microbes and warfare took on the native population. There was a

smallpox epidemic in 1519-20 when 5 to 8 million died. The epidemic of hemorrhagic fever in 1545 to

1548 was one of the worst demographic catastrophes in human history, killing 5 to 15 million people.

And then again in 1576 to 1578, when 2 to 2.5 million people died, we have clear evidence that land prices

in the Valley of Mexico (Coyoacán, a village outside Mexico City, as the reconstructed Tenochtitlán was

called) collapsed. The death toll was staggering. Lesser outbreaks were registered in 1559, 1566, 1587,

1592, 1601, 1604, 1606, 1613, 1624, and 1642. The larger point is that the intensive use of native labor, such

as the encomienda, had to come to an end, whatever its legal status had become by virtue of the New

Laws (1542). The encomienda or the simple exploitation of massive numbers of indigenous workers was

no longer possible. There were too few “Indians” by the end of the sixteenth century.[11]

As a result, the institutions and methods of economic appropriation were forced to change. The

Europeans introduced pastoral agriculture – the herding of cattle and sheep – and the use of now

abundant land and scarce labor in the form of the hacienda while the remaining natives were brought

together in “villages” whose origins were not essentially pre- but post-conquest, the so-called

congregaciones, at the same time that the titles to now-vacant lands were created, regularized and

“composed.”[12] (Land titles were a European innovation as well). Sheep and cattle, which the

Europeans introduced, became part of the new institutional backbone of the colony. The natives would

continue to rely on maize for the better part of their subsistence, but the Europeans introduced wheat,

olives (oil), grapes (wine) and even chickens, which the natives rapidly adopted. On the whole, the results

of these alterations were complex. Some scholars argue that the native diet improved even in the face of

their diminishing numbers, a consequence of increased land per person and of greater variety of

foodstuffs, and that the agricultural potential of the colony now called New Spain was enhanced. By the

beginning of the seventeenth century, the combined indigenous, European immigrant, and new mixed

blood populations could largely survive on the basis of their own production. The introduction of sheep

lead to the introduction and manufacture of woolens in what were called obrajes or manufactories in

Puebla, Querétaro, and Coyoacán. The native peoples continued to produce cottons (a domestic crop)

under the stimulus of European organization, lending, and marketing. Extensive pastoralism, the

cultivation of cereals and even the incorporation of native labor then characterized the emergence of the

great estates or haciendas, which became a characteristic rural institution through the twentieth century,

when the Mexican Revolution put an end to many of them. Thus the colony of New Spain continued to

feed, clothe and house itself independent of metropolitan Spain’s direction. Certainly, Mexico before the

Conquest was self-sufficient. The extent to which the immigrant and American Spaniard or creole

population depended on imports of wine, oil and other foodstuffs and textiles in the decades

immediately following the conquest is much less clear.

At the same time, other profound changes accompanied the introduction of Europeans, their crops and

their diseases into what they termed the “kingdom” (not colony, for constitutional reasons) of New

Spain.[13] Prior to the conquest, land and labor had been commoditized, but not to any significant

extent, although there was a distinction recognized between possession and ownership. Scholars who

have closely examined the emergence of land markets after the conquest—mainly in the Valley of

Mexico—are virtually unanimous in this conclusion. To the extent that markets in labor and

commodities had emerged, it took until the 1630s (and later elsewhere in New Spain) for the

development to reach maturity. Even older mechanisms of allocation of labor by administrative means

(repartimiento) or by outright coercion persisted. Purely economic incentives in the form of money

wages and prices never seemed adequate to the job of mobilizing resources and those with access to

political power were reluctant to pay a competitive wage. In New Spain, the use of some sort of political

power or rent-seeking nearly always accompanied labor recruitment. It was, quite simply, an attempt to

evade the implications of relative scarcity, and renders the entire notion of “capitalism” as a driving

economic force in colonial Mexico quite inexact.

Why the Settlers Resisted the Implications of Scarce Labor

The reasons behind this development are complex and varied. The evidence we have for the Valley of

Mexico demonstrates that the relative price of labor rose while the relative price of land fell even when

nominal movements of one or the other remained fairly limited. For instance, the table constructed

below demonstrates that from 1570-75 through 1591-1606, the price of unskilled labor in the Valley of

Mexico nearly tripled while the price of land in the Valley (Coyoacán) fell by nearly two thirds. On the

whole, the price of labor relative to land increased by nearly 800 percent. The evolution of relative prices

would have inevitably worked against the demanders of labor (Europeans and increasingly, creoles or

Americans of largely European ancestry) and in favor of the supplier (native labor, or people of mixed

race generically termed mestizo). This was not of course what the Europeans had in mind and by capture

of legal institutions (local magistrates, in particularly), frequently sought to substitute compulsion for

what would have been costly “free labor.” What has been termed the “depression” of the seventeenth

century may well represent one of the consequences of this evolution: an abundance of land, a scarcity

of labor, and the attempt of the new rulers to adjust to changing relative prices. There were repeated

royal prohibitions on the use of forced indigenous labor in both public and private works, and thus a

reduction in the supply of labor. All highly speculative, no doubt, but the adjustment came during the

central decades of the seventeenth century, when New Spain increasingly produced its own woolens and

cottons, and largely assumed the tasks of providing itself with foodstuffs and was thus required to save

and invest more. No doubt, the new rulers felt the strain of trying to do more with less.[14]

Years Land Price Index Labor Price Index (Labor/Land) Index

1570-1575 100 100 100

1576-1590 50 143 286

1591-1606 33 286 867

Source: Calculated from Rebecca Horn, Postconquest Coyoacan: Nahua-Spanish Relations in Central

Mexico, 1519-1650 (Stanford: Stanford University Press, 1997), p. 208 and José Ignacio Urquiola Permisan,

“Salarios y precios en la industria manufacturer textile de la lana en Nueva España, 1570-1635,” in

Virginia García Acosta, (ed.), Los precios de alimentos y manufacturas novohispanos (México, DF:

CIESAS, 1995), p. 206.

The overall role of Mexico within the Hapsburg Empire was in flux as well. Nothing signals the change as

much as the emergence of silver mining as the principal source of Mexican exportables in the second

half of the sixteenth century. While Mexico would soon be eclipsed by Peru as the most productive

center of silver mining—at least until the eighteenth century—the discovery of significant silver mines in

Zacatecas in the 1540s transformed the economy of the Spanish empire and the character of New Spain’s

as well.

Silver Mining

While silver mining and smelting was practiced before the conquest, it was never a focal point of

indigenous activity. But for the Europeans, Mexico was largely about silver mining. From the mid-

sixteenth century onward, it was explicitly understood by the viceroys that they were to do all in their

power to “favor the mines,” as one memorable royal instruction enjoined. Again, there has been much

controversy of the precise amounts of silver that Mexico sent to the Iberian Peninsula. What we do know

certainly is that Mexico (and the Spanish Empire) became the leading source of silver, monetary

reserves, and thus, of high-powered money. Over the course of the colonial period, most sources agree

that Mexico provided nearly 2 billion pesos (dollars) or roughly 1.6 billion troy ounces to the world

economy. The graph below provides a picture of the remissions of all Mexican silver to both Spain and to

the Philippines taken from the work of John TePaske.[15]

Since the population of Mexico under Spanish rule was at most 6 million people by the end of the

colonial period, the kingdom’s silver output could only be considered astronomical.

This production has to be considered in both its domestic and international dimensions. From a

domestic perspective, the mines were what a later generation of economists would call “growth poles.”

They were markets in which inputs were transformed into tradable outputs at a much higher rate of

productivity (because of mining’s relatively advanced technology) than Mexico’s other activities. Silver

thus became Mexico’s principal exportable good, and remained so well into the late nineteenth century.

The residual claimants on silver production were many and varied. There were, of course the silver

miners themselves in Mexico and their merchant financiers and suppliers. They ranged from some of the

wealthiest people in the world at the time, such as the Count of Regla (1710-1781), who donated warships

to Spain in the eighteenth century, to individual natives in Zacatecas smelting their own stocks of silver

ore.[16] While the conditions of labor in Mexico’s silver mines were almost uniformly bad, the

compensation ranged from above market wages paid to free labor in the prosperous larger mines of the

Bajío and the North to the use of forced village labor drafts in more marginal (and presumably less

profitable) sites such as Taxco. In the Iberian Peninsula, income from American silver mines ultimately

supported not only a class of merchant entrepreneurs in the large port cities, but virtually the core of the

Spanish political nation, including monarchs, royal officials, churchmen, the military and more. And

finally, silver flowed to those who valued it most highly throughout the world. It is generally estimated

that 40 percent of Spain’s American (not just Mexican, but Peruvian as well) silver production ended up

in hoards in China.

Within New Spain, mining centers such as Guanajuato, San Luis Potosí, and Zacatecas became places

where economic growth took place rapidly, in which labor markets more readily evolved, and in which

the standard of living became obviously higher than in neighboring regions. Mining centers tended to

crowd out growth elsewhere because the rate of return for successful mines exceeded what could be

gotten in commerce, agriculture and manufacturing. Because silver was the numeraire for Mexican

prices—Mexico was effectively on a silver standard—variations in silver production could and did have

substantial effects on real economic activity elsewhere in New Spain. There is considerable evidence that

silver mining saddled Mexico with an early case of “Dutch disease” in which irreducible costs imposed

by the silver standard ultimately rendered manufacturing and the production of other tradable goods in

New Spain uncompetitive. For this reason, the expansion of Mexican silver production in the years after

1750 was never unambiguously accompanied by overall, as opposed to localized prosperity. Silver

mining tended to absorb a disproportional quantity of resources and to keep New Spain’s price level

high, even when the business cycle slowed down—a fact that was to impress visitors to Mexico well into

the nineteenth century. Mexican silver accounted for well over three-quarters of exports by value into

the nineteenth century as well. The estimates vary widely, for silver was by no means the only, or even

the most important source of revenue to the Crown, but by the end of the colonial era, the Kingdom of

New Spain probably accounted for 25 percent of the Crown’s imperial income.[17] That is why reformist

proposals circulating in governing circles in Madrid in the late eighteenth century fixed on Mexico. If

there was any threat to the American Empire, royal officials thought that Mexico, and increasingly, Cuba,

were worth holding on to. From a fiscal standpoint, Mexico had become just that important.[18]

“New Spain”: The Second Phase of the Bourbon “Reforms”

In 1700, the last of the Spanish Hapsburgs died and a disputed succession followed. The ensuring

conflict, known as the War of Spanish Succession, came to an end in 1714. The grandson of French king

Louis XIV came to the Spanish throne as King Philip V. The dynasty he represented was known as the

Bourbons. For the next century of so, they were to determine the fortunes of New Spain. Traditionally,

the Bourbons, especially the later ones, have been associated with an effort to “renationalize” the

Spanish empire in America after it had been thoroughly penetrated by French, Dutch, and lastly, British

commercial interests.[19]

There were at least two areas in which the Bourbon dynasty, “reformist” or no, affected the Mexican

economy. One of them dealt with raising revenue and the other was the international position of the

imperial economy, specifically, the volume and value of trade. A series of statistics calculated by Richard

Garner shows that the share of Mexican output or estimated GDP taken by taxes grew by 167 percent

between 1700 and 1800. The number of taxes collected by the Royal Treasury increased from 34 to 112

between 1760 and 1810. This increase, sometimes labelled as a Bourbon “reconquest” of Mexico after a

century and a half of drift under the Hapsburgs, occurred because of Spain’s need to finance

increasingly frequent and costly wars of empire in the eighteenth century. An entire array of new taxes

and fiscal placemen came to Mexico. They affected (and alienated) everyone, from the wealthiest

merchant to the humblest villager. If they did nothing else, the Bourbons proved to be expert tax

collectors.[20]

The second and equally consequential change in imperial management lay in the revision and

“deregulation” of New Spain’s international trade, or the evolution from a “fleet” system to a regime of

independent sailings, and then, finally, of voyages to and from a far larger variety of metropolitan and

colonial ports. From the mid-sixteenth century onwards, ocean-going trade between Spain and the

Americas was, in theory, at least, closely regulated and supervised. Ships in convoy (flota) sailed together

annually under license from the monarchy and returned together as well. Since so much silver specie

was carried, the system made sense, even if the flotas made a tempting target and the problem of

contraband was immense. The point of departure was Seville and later, Cadiz. Under pressure from

other outports in the late eighteenth century, the system was finally relaxed. As a consequence, the

volume and value of trade to Mexico increased as the price of importables fell. Import-competing

industries in Mexico, especially textiles, suffered under competition and established merchants

complained that the new system of trade was too loose. But to no avail. There is no measure of the

barter terms of trade for the eighteenth century, but anecdotal evidence suggests they improved for

Mexico. Nevertheless, it is doubtful that these gains could have come anywhere close to offsetting the

financial cost of Spain’s “reconquest” of Mexico.[21]

On the other hand, the few accounts of per capita real income growth in the eighteenth century that

exist suggest little more than stagnation, the result of population growth and a rising price level.

Admittedly, looking for modern economic growth in Mexico in the eighteenth century is an

anachronism, although there is at least anecdotal evidence of technological change in silver mining,

especially in the use of gunpowder for blasting and excavating, and of some productivity increase in

silver mining. So even though the share of international trade outside of goods such as cochineal and

silver was quite small, at the margin, changes in the trade regime were important. There is also some

indication that asset income rose and labor income fell, which fueled growing social tensions in New

Spain. In the last analysis, the growing fiscal pressure of the Spanish empire came when the standard of

living for most people in Mexico—the native and mixed blood population—was stagnating. During

periodic subsistence crisis, especially those propagated by drought and epidemic disease, and mostly in

the 1780s, living standards fell. Many historians think of late colonial Mexico as something of a powder

keg waiting to explode. When it did, in 1810, the explosion was the result of a political crisis at home and

a dynastic failure abroad. What New Spain had negotiated during the Wars of Spanish Succession—

regime change– provide impossible to surmount during the Napoleonic Wars (1794-1815). This may well

be the most sensitive indicator of how economic conditions changed in New Spain under the heavy, not

to say clumsy hand, of the Bourbon “reforms.”[22]

The War for Independence, the Insurgency, and Their Legacy

The abdication of the Bourbon monarchy to Napoleon Bonaparte in 1808 produced a series of events

that ultimately resulted in the independence of New Spain. The rupture was accompanied by a violent

peasant rebellion headed by the clerics Miguel Hidalgo and José Morelos that, one way or another,

carried off 10 percent of the population between 1810 and 1820. Internal commerce was largely

paralyzed. Silver mining essentially collapsed between 1810 and 1812 and a full recovery of mining output

was delayed until the 1840s. The mines located in zones of heavy combat, such as Guanajuato and

Querétaro, were abandoned by fleeing workers. Thus neglected, they quickly flooded.

At the same time, the fiscal and human costs of this period, the Insurgency, were even greater.[23] The

heavy borrowings in which the Bourbons engaged to finance their military alliances left Mexico with a

considerable legacy of internal debt, estimated at £16 million at Independence. The damage to the fiscal,

bureaucratic and administrative structure of New Spain in the face of the continuing threat of Spanish

reinvasion (Spain did not recognize the Independence of Mexico (1821)) in the 1820s drove the

independent governments into foreign borrowing on the London market to the tune of £6.4 million in

order to finance continuing heavy military outlays. With a reduced fiscal capacity, in part the legacy of

the Insurgency and in part the deliberate effort of Mexican elites to resist any repetition Bourbon-style

taxation, Mexico defaulted on its foreign debt in 1827. For the next sixty years, through a serpentine

history of moratoria, restructuring and repudiation (1867), it took until 1884 for the government to

regain access to international capital markets, at what cost can only be imagined. Private sector

borrowing and lending continued, although to what extent is currently unknown. What is clear is that the

total (internal plus external) indebtedness of Mexico relative to late colonial GDP was somewhere in the

range of 47 to 56 percent.[24]

This was, perhaps, not an insubstantial amount for a country whose mechanisms of public finance were

in what could be mildly termed chaotic condition in the 1820s and 1830s as the form, philosophy, and

mechanics of government oscillated from federalist to centralist and back into the 1850s. Leaving aside

simple questions of uncertainty, there is the very real matter that the national government—whatever

the state of private wealth—lacked the capacity to service debt because national and regional elites

denied it the means to do so. This issue would bedevil successive regimes into the late nineteenth

century, and, indeed, into the twentieth.[25]

At the same time, the demographic effects of the Insurgency exacted a cost in terms of lost output from

the 1810s through the 1840s. Gaping holes in the labor force emerged, especially in the fertile agricultural

plains of the Bajío that created further obstacles to the growth of output. It is simply impossible to

generalize about the fortunes of the Mexican economy in this period because of the dramatic regional

variations in the Republic’s economy. A rough estimate of output per head in the late colonial period was

perhaps 40 pesos (dollars).[26] After a sharp contraction in the 1810s, income remained in that

neighborhood well into the 1840s, at least until the eve of the war with the United States in 1846. By the

time United States troops crossed the Rio Grande, a recovery had been under way, but the war arrested

it. Further political turmoil and civil war in the 1850s and 1860s represented setbacks as well. In this way,

a half century or so of potential economic growth was sacrificed from the 1810s through the 1870s. This

was not an uncommon experience in Latin America in the nineteenth century, and the period has even

been called The Stage of the Great Delay.[27] Whatever the exact rate of real per capita income growth

was, it is hard to imagine it ever exceeded two percent, if indeed it reached much more than half that.

Agricultural Recovery and War

On the other hand, it is clear that there was a recovery in agriculture in the central regions of the

country, most notably in the staple maize crop and in wheat. The famines of the late colonial era,

especially of 1785-86, when massive numbers perished, were not repeated. There were years of scarcity

and periodic corresponding outbreaks of epidemic disease—the cholera epidemic of 1832 affected

Mexico as it did so many other places—but by and large, the dramatic human wastage of the colonial

period ceased, and the death rate does appear to have begun to fall. Very good series on wheat deliveries

and retail sales taxes for the city of Puebla southeast of Mexico City show a similarly strong recovery in

the 1830s and early 1840s, punctuated only by the cholera epidemic whose effects were felt

everywhere.[28]

Ironically, while the Panic of 1837 appears to have at least hit the financial economy in Mexico hard with

a dramatic fall in public borrowing (and private lending), especially in the capital,[29] an incipient

recovery of the real economy was ended by war with the United States. It is not possible to put numbers

on the cost of the war to Mexico, which lasted intermittently from 1846 to 1848, but the loss of what had

been the Southwest under Mexico is most often emphasized. This may or may not be accurate.

Certainly, the loss of California, where gold was discovered in January 1848, weighs heavily on the

historical imaginations of modern Mexicans. There is also the sense that the indemnity paid by the

United States–$15 million—was wholly inadequate, which seems at least understandable when one

considers that Andrew Jackson offered $5 million to purchase Texas alone in 1829.

It has been estimated that the agricultural output of the Mexican “cession” as it was called in 1900, was

nearly $64 million, and that the value of livestock in the territory was over $100 million. The value of gold

and silver produced was about $35 million. Whether it is reasonable to employ the numbers in estimating

the present value of output relative to the indemnity paid is at least debatable as a counterfactual, unless

one chooses to regard this as the annuitized value on a perpetuity “purchased” from Mexico at

gunpoint, which seems more like robbery than exchange. In the long run, the loss may have been

staggering, but in the short run, much less so. The northern territories Mexico lost had really yielded very

little up until the War. In fact, the balance of costs and revenues to the Mexican government may well

have been negative.[30]

Whatever the case, the decades following the war with the United States until the beginning of the

administration of Porfirio Díaz (1876) are typically regarded as a step backward. The reasons are several.

In 1850, the government essentially went broke. While it is true that its financial position had

disintegrated since the mid-1830s, 1850 marked a turning point. The entire indemnity payment from the

United States was consumed in debt service, but this made no appreciable dent in the outstanding

principal, which hovered around 50 million pesos (dollars). The limits of debt sustainability had been

reached: governing was turned into a wild search for resources, which proved fruitless. Mexico

continued to sell of parts of its territory, such as the Treaty of the Mesilla (1853), or Gadsden Purchase,

whose proceeds largely ended up in the hands of domestic financiers rather than foreign creditors’.[31]

Political divisions, if anything, terrible before the war with the United States, turned catastrophic. A series

of internal revolts, uprisings and military pronouncements segued into yet another violent civil war

between liberals and conservatives—now a formal party—the so-called Three Years’ War (1856-58). In

1862, frustrated by Mexico’s suspension of foreign debt service, Great Britain, Spain and France seized

Veracruz. A Hapsburg prince, Maximilian, was installed as Mexico’s second “emperor.” (Agustín de

Iturbide was the first). While only the French actively prosecuted the war within Mexico, and while they

never controlled more than a very small part of the country, the disruption was substantial. By 1867, with

Maximillian deposed and the French army withdrawn, the country required serious reconstruction. [32]

Juárez, Díaz and the Porfiriato: authoritarian development.

To be sure, the origins of authoritarian development in nineteenth century Mexico were not with Porfirio

Díaz, as is often asserted. Their beginnings actually went back several decades earlier, to the last

presidency of Santa Anna, generally known as the Dictatorship (1853-54). But Santa Anna was

overthrown too quickly, and now for the last time, for much to have actually occurred. A ministry for

development (Fomento) had been created, but the Liberal revolution of Ayutla swept Santa Anna and his

clique away for good. Serious reform seems to have begun around 1870, when the Finance Minister was

Matías Romero. Romero was intent on providing Mexico with a modern Treasury, and on ending the

hand-to- mouth financing that had mostly characterized the country’s government since Independence,

or at least since the mid-1830s. So it is appropriate to pick up with the story here. Where did Mexico

stand in 1870?[33]

The most revealing data that we have on the state of economic development come from various

anthropometric and cost of living studies by Amilcar Challu, Aurora Gómez Galvarriato, and Moramay

López Alonso.[34] Their research overlaps in part, and gives a fascinating picture of Mexico in the long

run, from 1735 to 1940. For the moment, let us look at the period leading up to 1867, when the French

withdrew from Mexico. If we look at the heights of the “literate” population, Challu’s research suggests

that the standard of living stagnated between 1750 and 1840. If we look at the “illiterate” population,

there was a consistent decline until 1850. Since the share of the illiterate population was clearly larger, we

might infer that living standards for most Mexicans declined after 1750, however we interpret other

quantitative and anecdotal evidence.

López Alonso confines her work to the period after the 1840s. From 1850 through 1890, her work

generally corroborates Challu’s. The period after the Mexican War was clearly a difficult one for most

Mexicans, and the challenge that both Juárez and Díaz faced was a macroeconomy in frank contraction

after 1850. The regimes after 1867 were faced with stagnation.

The real wage study of by Amilcar Challu and Aurora Gómez Galvarriato, when combined with the

existing anthropometric work, offers a pretty clear correlation between movements in real wages (down)

and height (falling). [35]

It would then appear growth from the 1850s through the 1870s was slow—if there was any at all—and

perhaps inferior to what had come between the 1820s and the 1840s. Given the growth of import

substitution during the Napoleonic Wars, roughly 1790-1810, coupled with the commercial opening

brought by the Bourbons’ post-1789 extension of “free trade” to Mexico, we might well see a pattern of

mixed performance (1790-1810), sharp contraction (the 1810s), rebound and recovery, with a sharp

financial shocks coming in the mid-1820s and mid -1830s (1820s-1840s), and stagnation once more

(1850s-1870s). Real per capita output oscillated, sometimes sharply, around an underlying growth rate of

perhaps one percent; changes in the distribution of income and wealth are more or less impossible to

identify consistently, because studies conflict.

Far less speculative is that the foundations for modern economic growth were laid down in Mexico

during the era of Benito Juárez. Its key elements were the creation of a secular, bourgeois state and

secular institutions embedded in the Constitution of 1857. The titanic ideological struggles between

liberals and conservatives were ultimately resolved in favor of a liberal, but nevertheless centralizing

form of government under Porfirio Diáz. This was the beginning of the end of the Ancien Regime. Under

Juárez, corporate lands of the Church and native villages were privatized in favor of individual holdings

and their former owners compensated in bonds. This was effectively the largest transfer of land title

since the late sixteenth century (not including the war with the United States) and it cemented the idea of

individual property rights. With the expulsion of the French and the outright repudiation of the French

debt, the Treasury was reorganized along more modern lines. The country got additional breathing

room by the suspension of debt service to Great Britain until the terms of the 1825 loans were

renegotiated under the Dublán Convention (1884). Equally, if not more important, Mexico now entered

the railroad age in 1876, nearly forty years after the first tracks were laid in Cuba in 1837. The educational

system was expanded in an attempt to create at least a core of literate citizens who could adopt the tools

of modern finance and technology. Literacy still remained in the neighborhood of 20 percent, and life

expectancy at birth scarcely reached 40 years of age, if that. Yet by the end of the Restored Republic

(1876), Mexico had turned a corner. There would be regressions, but the nineteenth century had finally

arrived, aptly if brutally signified by Juárez’ execution of Maximilian in Querétaro in 1867.[36]

Porfirian Mexico

Yet when Díaz came to power, Mexico was, in many ways, much as it had been a century earlier. It was a

rural, agrarian nation whose primary agricultural output per person was maize, followed by wheat and

beans. These were produced on haciendas and ranchos in Jalisco, Guanajuato, Michoacán, Mexico,

Puebla as well as Oaxaca, Veracruz, Aguascalientes, Chihuahua and Sonora. Cotton, which with great

difficulty had begun to supply a mechanized factory regime (first in spinning, then weaving) was

produced in Oaxaca, Yucatán, Guerrero and Chiapas as well as in parts of Durango and Coahuila.

Domestic production of raw cotton rarely sufficed to supply factories in Michoacán, Querétaro, Puebla

and Veracruz, so imports from the Southern United States were common. For the most part, the

indigenous population lived on maize, beans, and chile, producing its own subsistence on small,

scattered plots known as milpas. Perhaps 75 percent of the population was rural, with the remainder to

be found in cities like Mexico, Guadalajara, San Luis Potosí, and later, Monterrey. Population growth in

the Southern and Eastern parts of the country had been relatively slow in the nineteenth century. The

North and the center North grew more rapidly. The Center of the country, less so. Immigration from

abroad had been of no consequence.[37]

It is a commonplace to see the presidency of Porfirio Díaz (1876-1910) as a critical juncture in Mexican

history, and this would be no less true of economic or commercial history as well. By 1910, when the

Díaz government fell and Mexico descended into two decades of revolution, the first one extremely

violent, the face of the country had been changed for good. The nature and effect of these changes

remain not only controversial, but essential for understanding the subsequent evolution of the country,

so we should pause here to consider some of their essential features.

While mining and especially, silver mining, had long held a privileged place in the economy, the

nineteenth century had witnessed a number of significant changes. Until about 1889, the coinage of gold,

silver, and copper—a very rough proxy for production given how much silver had been illegally exported

—continued on a steadily upward track. In 1822, coinage was about 10 million pesos. By 1846, it had

reached roughly 15 million pesos. There was something of a structural break after the war with the

United States (its origins are unclear), and coinage continued upward to about 25 million pesos in 1888.

Then, the falling international price of silver, brought on by large increases in supply elsewhere, drove

the trend after 1889 sharply downward. By 1909-10, coinage had collapsed to levels previously

unrecorded since the 1820s, although in 1904 and 1905, it had skyrocketed to nearly 45 million pesos.[38]

It comes as no surprise that these variations in production corresponded to sharp changes in

international relative prices. For example, the market price of silver declined sharply relative to lead,

which in turn encountered a large increase in Mexican production and a diversification into other metals

including zinc, antinomy, and copper. Mexico left the silver standard (for international transactions, but

continued to use silver domestically) in 1905, which contributed to the eclipse of this one crucial

industry, which would never again have the status it had when Díaz became president in 1876, when

precious metals represented 75 percent of Mexican exports by value. By the time he had decamped in

exile to Paris, precious metals accounted for less than half of all exports.

The reason for this relative decline was the diversification of agricultural exports that had been slowly

occurring since the 1870s. Coffee, cotton, sugar, sisal and vanilla were the principal crops, and some

regions of the country such as Yucatán (henequen) and Durango and Tamaulipas (cotton) supplied new

export crops.

Railroads and Infrastructure

None of be of this would have occurred without the massive changes in land tenure that had begun in

the 1850s, but most of all, without the construction of railroads financed by the migration of foreign

capital to Mexico under Díaz. At one level, it is a well-known story of social savings, which were

substantial in Mexico because the terrain was difficult and the alternative modes of carriage few. One

way or another, transportation has always been viewed as an “obstacle” to Mexican economic

development. That must be true at some level, although recent studies (especially by Sandra Kuntz) have

raised important qualifications. Railroads may not have been gateways to foreign dependency, as

historians once argued, but there were limits to their ability to effect economic change, even internally.

They tended to enlarge the internal market for some commodities more than others. The peculiarities of

rate-making produced other distortions, while markets for some commodities were inevitably

concentrated in major cities or transshipment points which afforded some monopoly power to

distributors even as a national market in basic commodities became more of a reality. Yet, in general, the

changes were far reaching.[39]

Conventional figures confirm conventional wisdom. When Díaz assumed the presidency, there were 660

km (410 miles) of track. In 1910, there were 19,280 km (about 12,000 miles). Seven major lines linked the

cities of Mexico, Veracruz, Acapulco, Juárez, Laredo, Puebla, Oaxaca. Monterrey and Tampico in 1892.

The lines were built by foreign capital (e.g., the Central Mexicano was built by the Atchison, Topeka and

Santa Fe), which is why resolving the long-standing questions of foreign debt service were critical. Large

government subsidies on the order of 3,500 to 8,000 pesos per km were granted, and financing the

subsidies amounted to over 30 million pesos by 1890. While the railroads were successful in creating

more of a national market, especially in the North, their finances were badly affected by the depreciation

of the silver peso, given that foreign liabilities had to be liquidated in gold.

As a result, the government nationalized the railroads in 1903. At the same time, it undertook an

enormous effort to construct infrastructure such as drainage and ports, virtually all of which were

financed by British capital and managed by “Don Porfirio’s contactor,” Sir Weetman Pearson. Between

railroads, ports, drainage works and irrigation facilities, the Mexican government borrowed 157 million

pesos to finance costs.[40]

The expansion of the railroads, the build-out of infrastructure and the expansion of trade would have

normally increased output per capita. Any data we have prior to 1930 are problematic, and before 1895,

strictly speaking, we have no official measures of output per capita at all. Most scholars shy away from

using levels of GDP in any form, other than for illustrative purposes. Aside from the usual problems

attending national income accounting, Mexico presents a few exceptional challenges. In peasant families,

where women were entrusted with converting maize into tortilla, no small job, the omission of their

value added from GDP must constitute a sizeable defect in measured output. Moreover, as the

commercial radius of Mexican agriculture expanded rapidly as railroads, roads, and later, highways

spread extensively, growth rates represented increased commercialization rather than increased growth.

We have no idea how important this phenomenon was, but it is worth keeping in mind when we look at

very rapid growth rates after 1940.

There are various measures of cumulative growth during the Porfiriato. By and large, the figure from

1900 through 1910 is around 23 percent, which is certainly higher than rates achieved during the

nineteenth century, but nothing like what was recorded after 1940. In light of declining real wages, one

can only assume that the bulk of “progress” flowed to the recipients of property income. This may well

have represented a reversal of trends in the nineteenth century, when some argue that property income

contracted in the wake of the Insurgency[41].

There was also significant industrialization in Mexico during the Porfiriato. Some industry, especially

textiles, had its origins in the 1840s, but its size, scale and location altered dramatically by the end of the

nineteenth century. For example, the cotton textile industry saw the number of workers, spindles and

looms more than double from the late 1870s to the first decade of the nineteenth century. Brewing and

its associated industry, glassmaking, became well established in Monterrey during the 1890s. The

country’s first iron and steel mill, Fundidora Monterrey, was established there as well in 1903. Other

industries, such as papermaking and cigarettes followed suit. By the end of the Porfiriato, over 10

percent of Mexico’s output was certainly industrial.[42]

From Revolution to “Miracle”

The Mexican Revolution (1910-1940) began as a political upheaval provoked by a crisis in the presidential

succession when Porfirio Díaz refused to leave office in the wake of electoral defeat after signaling his

willingness to do so in a famous pubic interview of 1908.[43] It was also the result of an agrarian uprising

and the insistent demand of Mexico’s growing industrial proletariat for a share of political power. Finally,

there was a small (fewer than 10 percent of all households) but upwardly mobile urban middle class

created by economic development under Díaz whose access to political power had been effectively

blocked by the regime’s mechanics of political control. Precisely how “revolutionary” were the results of

the armed revolt—which persisted largely through the 1910s and peaked in a civil war in 1914-1915—has

long been contentious, but is only tangentially relevant as a matter of economic history. The Mexican

Revolution was no Bolshevik movement (of course, it predated Bolshevism by seven years) but it was not

a purely bourgeois constitutional movement either, although it did contain substantial elements of both.

From a macroeconomic standpoint, it has become fashionable to argue that the Revolution had few, if

any, profound economic consequences. It seems as if the principal reason was that revolutionary

factions were interested in appropriating rather than destroying the means of production. For example,

the production of crude oil peaked in Mexico in 1915—at the height of the Revolution—because crude

oil could be used as a source of income to the group controlling the wells in Veracruz state. This was a

powerful consideration.[44]

Yet in another sense, the conclusion that the Revolution had slight economic effects is not only facile, but

obviously wrong. As the demographic historian Robert McCaa showed, the excess mortality occasioned

by the Revolution was larger than any similar event in Mexican history other than the conquest in the

sixteenth century. There has been no attempt made to measure the output lost by the demographic

wastage (including births that never occurred), yet even the effect on the population cohort born

between 1910 and 1920 is plain to see in later demographic studies. [45]

There is also a subtler question that some scholars have raised. The Revolution increased labor mobility

and the labor supply by abolishing constraints on the rural population such as debt peonage and even

outright slavery. Moreover, the Revolution, by encouraging and ultimately setting into motion a massive

redistribution of previously privatized land, contributed to an enlarged supply of that factor of

production as well. The true impact of these developments was realized in the 1940s and 1950s, when

rapid economic growth began, the so-called Mexican Miracle, which was characterized by rates of real

growth of as much as 6 percent per year (1955-1966). Whatever the connection between the Revolution

and the Miracle, it will require a serious examination on empirical grounds and not simply a dogmatic

dismissal of what is now regarded as unfashionable development thinking: import substitution and

inward-oriented growth.[46]

The other major consequence of the Revolution, the agrarian reform and the creation of the ejido, or

land granted by the Mexican state to rural population under the authority provided it by the

revolutionary Constitution on 1917 took considerable time to coalesce, and were arguably not even high

on one of the Revolution’s principal instigators, Francisco Madero’s, list of priorities. The redistribution

of land to the peasantry in the form of possession if not ownership – a kind of return to real or fictitious

preconquest and colonial forms of land tenure – did peak during the avowedly reformist, and even

modestly radical presidency of Lázaro Cárdenas (1934-1940) after making only halting progress under his

predecessors since the 1920s. From 1940 to 1965, the cultivated area in Mexico grew at 3.7 percent per

year and the rise in productivity in basic food crops was 2.8 percent per year.

Nevertheless, the long-run effects of the agrarian reform and land redistribution have been predictably

controversial. Under the presidency of Carlos Salinas (1988-1994) the reform was officially declared over,

with no further land redistribution to be undertaken and the legal status of the ejido definitively changed.

The principal criticism of the ejido was that, in the long run, it encouraged inefficiently small landholding

per farmer and, by virtue of its limitations on property rights, made agricultural credit difficult for

peasants to obtain.[47]

There is no doubt these are justifiable criticisms, but they have to be placed in context. Cárdenas’

predecessors in office, Alvaro Obregón (1924-1928) and Plutarco Elías Calles (1928-1932) may well have

preferred a more commercial model of agriculture with larger, irrigated holdings. But it is worth

recalling that one of the original agrarian leaders of the Revolution, Emiliano Zapata, had an uneasy

relationship with Madero, who saw the Revolution in mostly political terms, from the start and quickly

rejected Madero’s leadership in favor of restoring peasant lands in his native state of Morelos. Cárdenas,

who was in the midst of several major maneuvers that would require widespread popular support—such

as the expropriation of foreign oil companies operating in Mexico in March 1938—was undoubtedly

sensitive to the need to mobilize the peasantry on his behalf. The agrarian reform of his presidency,

which surpassed that of any other, needs to be considered in those terms as well as in terms of economic

efficiency.[48]

Cárdenas’ presidency also coincided with the continuation of the Great Depression. Like other countries

in Latin America, Mexico was hard hit by the Great Depression, at least through the early 1930s. All sorts

of consumer goods became scarcer, and the depreciation of the peso raised the relative price of imports.

As had happened previously in Mexican history (1790-1810, during the Napoleonic Wars and the

disruption of the Atlantic trade), in the medium term domestic industry was nevertheless given a

stimulus and import substitution, the subsequent core of Mexico’s industrialization program after World

War II, was given a decisive boost. On the other hand, Mexico also experienced the forced “repatriation”

of people of Mexican descent, mostly from California, of whom 60 percent were United States citizens.

The effects of this movement—the emigration of the Revolution in reverse—has never been properly

analyzed. The general consensus is that World War II helped Mexico to prosper. Demand for labor and

materials from the United States, to which Mexico was allied, raised real wages and incomes, and thus

boosted aggregate demand. From 1939 through 1946, real output in Mexico grew by approximately 50

percent. The growth in population accelerated as well as the country began to move into the later stages

of the demographic transition, with a falling death rate, while birth rates remained high.[49]

From Miracle to Meltdown: 1950-1982

The history of import substitution manufacturing did not begin with postwar Mexico, but few countries

(especially in Latin America) became as identified with the policy in the 1950s, and with what Mexicans

termed the emergence of “stabilizing development.” There was never anything resembling a formal

policy announcement, although Raúl Prebisch’s 1949 manifesto, “The Economic Development of Latin

America and its Principal Problems” might be regarded as supplying one. Prebisch’s argument, that a

directed change in the composition of imports toward capital goods to facilitate domestic

industrialization was, in essence, the basis of the policy that Mexico followed. Mexico stabilized the

nominal exchange rate at 12.5 pesos to the dollar in 1954, but further movement in the real exchange

rate (until the 1970s) were unimportant. The substantive bias of import substitution in Mexico was a high

effective rate of protection to both capital and consumer goods. Jaime Ros has calculated these rates in

1960 ranged between 47 and 85 percent, and between 33 and 109 percent in 1980. The result, in the short

to intermediate run, was very rapid rates of economic growth, averaging 6.5 percent in 1950 through

1973. Other than Brazil, which also followed an import substitution regime, no country in Latin America

experienced higher rates of growth. Mexico’s was substantially above the regional average. [50]

[See the historical graph of population growth in Mexico through 2000 below]

Source: Essentially, Estadísticas Históricas de México (various editions since 1999; the most recent is

2014)

http://dgcnesyp.inegi.org.mx/ehm/ehm.htm (Accessed July 20, 2016)

But there were unexpected results as well. The contribution of labor to GDP growth was 14 percent.

Capital’s contribution was 53 percent, and the remainder, total factor productivity (TFP) 28 percent.[51]

As a consequence, while Mexico’s growth occurred through the accumulation of capital, the distribution

of income became extremely skewed. The ratio of the top 10 percent of household income to the

bottom 40 percent was 7 in 1960, and 6 in 1968. Even supporters of Mexico’s development program, such

as Carlos Tello, conceded that it probable that it was the organized peasants and workers experienced an

effective improvement of their relative position. The fruits of the Revolution were unevenly distributed,

even among the working class.[52]

By “organized” one means such groups as the most important labor union in the country, the CTM

(Confederation of Mexican Workers) or the nationally recognized peasant union, the CNC, both of which

formed two of the three organized sectors of the official government party, the PRI, or Party of the

Institutional Revolution that was organized in 1946. The CTM in particular was instrumental in

supporting the official policy of import substitution, and thus benefited from government wage setting

and political support. The leaders of these organizations became important political figures in their own

right. One, Fidel Velázquez, as both a federal senator and the head of the CTM from 1941 to his death in

1997. The incorporation of these labor and peasant groups into the political system offered the

government both a means of control and a guarantee of electoral support. They became pillars of what

the Peruvian writer Mario Vargas Llosa famously called “the perfect dictatorship” of the PRI from 1946

to 2000, during which the PRI held a monopoly of the presidency and the important offices of state. In a

sense, import substitution was the economic ideology of the PRI.[53]

Labor and economic development during the years of rapid growth is, like many others, a debated

subject. While some have found strong wage growth, others, looking mostly at Mexico City, have found

declining real wages. Beyond that, there is the question of informality and a segmented labor market.

Were workers in the CTM the real beneficiaries of economic growth, while others in the informal sector

(defined as receiving no social security payments, meaning roughly two-thirds of Mexican workers) did

far less well? Obviously, the attraction of a segmented labor market model can address one obvious

puzzle: why would industry substitute capital for labor, as it obviously did, if real wages were not rising?

Postulating an informal sector that absorbed the rapid influx of rural migrants and thus held nominal

wages steady while organized labor in the CTM got the benefit of higher negotiated wages, but in so

doing, limited their employment is an attractive hypothesis, but would not command universal

agreement. Nothing has been resolved, at least for the period of the “Miracle.” After Mexico entered a

prolonged series of economic crises in the 1980s—here labelled as “meltdown”—the discussion must

change, because many hold that the key to relative political stability and the failure of open

unemployment to rise sharply can be explained by falling real wages.

The fiscal basis on which the years of the Miracle were constructed was conventional, not to say

conservative.[54] A stable nominal exchange rate, balanced budgets, limited public borrowing, and a

predictable monetary policy were all predicated on the notion that the private sector would react

positively to favorable incentives. By and large, it did. Until the late 1960s, foreign borrowing was

considered inconsequential, even if there was some concern on the horizon that it was starting to rise.

No one foresaw serious macroeconomic instability. It is worth consulting a brief memorandum from

Secretary of State Dean Rusk to President Lyndon Johnson (Washington, December 11, 1968) –to get

some insight into how informed contemporaries viewed Mexico. The instability that existed was seen as a

consequence of heavy-handedness on the part of the PRI and overreaction in the security forces.

Informed observers did not view Mexico’s embrace of import-substitution industrialization as a train

wreck waiting to happen. Historical actors are rarely so prescient.[55]

Slowing of the Miracle and Echeverría

The most obvious problems in Mexico were political. They stemmed from the increasing awareness that

the limits of the “institutional revolution” had been reached, particularly regarding the growing

democratic demands of the urban middle classes. The economic problem, which was far from obvious,

was that import substitution had concentrated income in the upper 10 per cent of the population, so that

domestic demand had begun to stagnate. Initially at least, public sector borrowing could support a

variety of consumption subsidies to the population, and there were also efforts to transfer resources out

of agriculture via domestic prices for staples such as maize. Yet Mexico’s population was also growing at

the rate of nearly 3 percent per year, so that the long term prospects for any of these measures were

cloudy.

At the same time, growing political pressures on the PRI, mostly dramatically manifest in the army’s

violent repression of student demonstrators at Tlatelolco in 1968 just prior to the Olympics, had

convinced some elements in the PRI, people like Carlos Madrazo, to argue for more radical change. The

emergence of an incipient guerilla movement in the state of Guerrero had much the same effect. The

new president, Luis Echeverría (1970-76), openly pushed for changes in the distribution of income and

wealth, incited agrarian discontent for political purposes, dramatically increased government spending

and borrowing, and alienated what had typically been a complaisant, if not especially friendly private

sector.

The country’s macroeconomic performance began to deteriorate dramatically. Inflation, normally in the

range of about 5 percent, rose into the low 20 percent range in the early 1970s. The public sector deficit,

fueled by increasing social spending, rose from 2 to 7 percent of GDP. Money supply growth now

averaged about 14 percent per year. Real GDP growth had begun to slip after 1968 and in the early 1970s,

in deteriorated more, if unevenly. There had been clear convergence of regional economies in Mexico

between 1930 and 1980 because of changing patterns of industrialization in the northern and central

regions of the country. After 1980, that process stalled and regional inequality again widened. [56]

While there is a tendency to blame Luis Echeverria for all or most of these developments, this forgets

that his administration coincided with the First OPEC oil shock (1973) and rapidly deteriorating external

conditions. Mexico had, as yet, not discovered the oil reserves (1978) that were to provide a temporary

respite from economic adjustment after the shock of the peso devaluation of 1976—the first change in its

value in over 20 years. At the same time, external demand fell, principally transmitted from the United

States, Mexico’s largest trading partner, where the economy had fallen into recession in late 1973. Yet it

seems reasonable to conclude that the difficult international environment, while important in bring

Mexico’s “miracle” period to a close, was not helped by Echeverría’s propensity for demagoguery, of the

loss of fiscal discipline that had long characterized government policy, at least since the 1950s. The only

question to be resolved was to what sort of conclusion the period would come. The answer,

unfortunately, was disastrous.[57]

Meltdown: The Debt Crisis, the Lost Decade and After

In contemporary parlance, Mexico had passed from “stabilizing” to “shared” development under

Echeverría. But the devaluation of 1976 from 12.5 to 20.5 pesos to the dollar suggested that something

had gone awry. One might suppose that some adjustment in course, especially in public spending and

borrowing, would have occurred. But precisely the opposite occurred. Between 1976 and 1979, nominal

federal spending doubled. The budget deficit increased by a factor of 15. The reason for this odd

performance was the discovery of crude oil in the Gulf of Mexico, perhaps unsurprising in light of the

spiking prices of the 1970s (the oil shocks of 1973-74, 1978-79), but nevertheless of considerable

magnitude. In 1975, Mexico’s proven reserves were 6 billion barrels of oil. By 1978, they had increased to

40 billion. President López Portillo set himself to the task of “administering abundance” and Mexican

analysts confidently predicted crude oil at $100 a barrel (when it stood at $37 in current prices in 1980).

The scope of the miscalculation was catastrophic. At the same time, encouraged by bank loan pushing

and effectively negative real rates of interest, Mexico borrowed abroad. Consumption subsidies, while

vital in the face of slowing import substitution, were also costly, and when supported by foreign

borrowing, unsustainable, but foreign indebtedness doubled between 1976 and 1979, and even further

thereafter.

Matters came to a head in 1982. By then, Mexico’s foreign indebtedness was estimated at over $80 billion

dollars, an increase from less than $20 billion in 1975. Real interest rates had begun to rise in the United

States in mid-1981, and with Mexican borrowing tied to international rates, debt service rapidly

increased. Oil revenue, which had come to constitute the great bulk of foreign exchange, followed

international crude prices downward, driven in large part by a recession that had begun in the United

States in mid-1981. Within six months, Mexico, too, had fallen into recession. Real per capital output was

to decline by 8 percent in 1982. Forced to sharply devalue, the real exchange rate fell by 50 percent in

1982 and inflation approached 100 percent. By the late summer, Finance Minister Jesus Silva Herzog

admitted that the country could not meet an upcoming payment obligation, and was forced to turn to

the US Federal Reserve, to the IMF, and to a committee of bank creditors for assistance. In late August,

in a remarkable display of intemperance, President López Portillo nationalized the banking system. By

December 20, 1982, Mexico’s incoming President, Miguel de la Madrid (1982-88) appeared, beleaguered,

on the cover of Time Magazine framed by the caption, “We are in an Emergency.” It was, as the saying

goes, a perfect storm, and with it, the Debt Crisis and the “Lost Decade” in Mexico had begun. It would

be years before anything resembling stability, let alone prosperity, was restored. Even then, what growth

there was a pale imitation of what had occurred during the decades of the “Miracle.”

The 1980s

The 1980s were a difficult decade.[58] After 1981, annual real per capita growth would not reach 4

percent again until 1989, and in 1986, it fell by 6 percent. In 1987, inflation reached 159 percent. The

nominal exchange rate fell by 139 percent in 1986-1987. By the standards of the years of stabilizing

development, the record of the 1980s was disastrous. To complete the devastation, on September 19,

1985, the worst earthquake in Mexican history, 7.8 on the Richter Scale, devastated large parts of central

Mexico City and killed 5 thousand (some estimates run as high as 25 thousand), many of whom were

simply buried in mass graves. It was as if a plague of biblical proportions had struck the country.

Massive indebtedness produced a dramatic decline in the standard of living as structural adjustment

occurred. Servicing the debt required the production of an export surplus in non-oil exports, which in

turn, required a reduction in domestic consumption. In an effort to surmount the crisis, the government

implemented an agreement between organized labor, the private sector, and agricultural producers

called the Economic Solidarity Pact (PSE). The PSE combined an incomes policy with fiscal austerity,

trade and financial liberalization, generally tight monetary policy, and debt renegotiation and reduction.

The centerpiece of the “remaking” of the previously inward orientation of the domestic economy was

the North American Free Trade Agreement (NAFTA, 1993) linking Mexico, the United States, and

Canada. While average tariff rates in Mexico had fallen from 34 percent in 1985 to 4 percent in 1992—

even before NAFTA was signed—the agreement was generally seen as creating the institutional and legal

framework whereby the reforms of Miguel de la Madrid and Carlos Salinas (1988-1994) would be

preserved. Most economists thought its effects would be relatively larger in Mexico than in the United

States, which generally appears to have been the case. Nevertheless, NAFTA has been predictably

controversial, as trade agreements are wont to be. The political furor (and, in some places, euphoria)

surrounding the agreement have faded, but never entirely disappeared. In the United States in particular,

NAFTA is blamed for deindustrialization, although pressure on manufacturing, like trade liberalization

itself, was underway long before NAFTA was negotiated. In Mexico, there has been much hand wringing

over the fate of agriculture and small maize producers in particular. While none of this is likely to cease,

it is nevertheless the case that there has been a large increase in the volume of trade between the NAFTA

partners. To dismiss this is, quite plainly, misguided, even where sensitive and well organized political

constituencies are concerned. But the legacy of NAFTA, like most everything in Mexican economic

history, remains unsettled.

Post Crisis: No Miracles

Still, while some prosperity was restored to Mexico by the reforms of the 1980s and 1990s, the general

macroeconomic results have been disappointing, not to say mediocre. The average real compensation

per person in manufacturing in 2008 was virtually unchanged from 1993 according to the Instituto

Nacional De Estadística Geografía e Informática, and there is little reason to think the compensation has

improved at all since then. It is generally conceded that per capita GDP growth has probably averaged

not much more than 1 percent a year. Real GDP growth since NAFTA according to the OECD has rarely

reached 5 percent and since 2010, it has been well below that.

Source: http://www.worldbank.org/en/country/mexico (Accessed July 21, 2016). The vertical scale cuts

the horizontal axis at 1982

For virtually everyone in Mexico, the question is why, and the answers proposed include virtually any

plausible factor: the breakdown of the political system after the PRI’s historic loss of presidential power

in 2000; the rise of China as a competitor to Mexico in international markets; the explosive spread of

narcoviolence in recent years, albeit concentrated in the states of Sonora, Sinaloa, Tamaulipas, Nuevo

León and Veracruz; the results of NAFTA itself; the failure of the political system to undertake further

structural economic reforms and privatizations after the initial changes of the 1980s, especially regarding

the national oil monopoly, Petroleos Mexicanos (PEMEX); the failure of the border industrialization

program (maquiladoras) to develop substantive backward linkages to the rest of the economy. This is by

no means an exhaustive list of the candidates for poor economic performance. The choice of a cause

tends to reflect the ideology of the critic.[59]

Yet it seems that, at the end of the day, the reason why post-NAFTA Mexico has failed to grow comes

down to something much more fundamental: a fear of growing, embedded in the belief that the collapse

of the 1980s and early 1990s (including the devastating “Tequila Crisis” of 1994-1995, which resulted in a

another enormous devaluation of the peso after an initial attempt to contain the crisis was bungled) was

so traumatic and costly as to render event modest efforts to promote growth, let alone the dirigisme of

times past, as essentially unwarranted. The central bank, the Banco de México (Banxico) rules out the

promotion of economic growth as part of its remit—even as a theoretical proposition, let alone as a goal

of macroeconomic policy– and concerns itself only with price stability. The language of its formulation is

striking. “During the 1970s, there was a debate as to whether it was possible to stimulate economic

growth via monetary policy. As a result, some governments and central banks tried to reduce

unemployment through expansive monetary policy. Both economic theory and the experience of

economies that tried this prescription demonstrated that it lacked validity. Thus, it became clear that

monetary policy could not actively and directly stimulate economic activity and employment. For that

reason, modern central banks have as their primary goal the promotion of price stability” (translation

mine). Banxico is not the Fed: there is no dual mandate in Mexico.[60]

The Mexican banking system has scarcely made things easier. Private credit stands at only about a third

of GDP. In recent years, the increase in private sector savings has been largely channeled to government

bonds, but until quite recently, public sector deficits were very small, which is to say, fiscal policy has not

been expansionary. If monetary and fiscal policy are both relatively tight, if private credit is not easy to

come by, and if growth is typically presumed to be an inevitable concomitant to economic stability for

which no actor (other than the private sector) is deemed responsible, it should come as no surprise that

economic growth over the past two decades has been lackluster. In the long run, aggregate supply

determines real GDP, but in the short run, nominal demand matters: there is no point in creating

productive capacity to satisfy demand that does not exist. And, unlike during the period of the Miracle

and Stabilizing Development, attention to demand since 1982 has been limited, not to say off the table

completely. It may be understandable, but Mexico’s fiscal and monetary authorities seem to suffer from

what could be termed, “Fear of Growth.” For better or worse, the results are now on display. After its

current (2016) return to a relatively austere budget, it remains to be seen how the economic and political

system in contemporary Mexico handles slow economic growth. For that would now seem to be, in a

basic sense, its largest challenge for the future.

[1] I am grateful to Ivan Escamilla and Robert Whaples for their careful readings and thoughtful

criticisms.

[2] The standard reference work is Sandra Kuntz Ficker, (ed), Historia económica general de México. De

la Colonia a nuestros días (México, DF: El Colegio de Mexico, 2010).

[3] Oscar Martinez, Troublesome Border (rev. ed., University of Arizona Press: Tucson, AZ, 2006) is the

most helpful general account in English.

[4] There are literally dozens of general accounts of the pre-conquest world. A good starting point is

Richard E.W. Adams, Prehistoric Mesoamerica (3d ed., University of Oklahoma Press: Norman, OK,

2005). More advanced is Richard E.W. Adams and Murdo J. Macleod, The Cambridge History of the

Mesoamerican Peoples: Mesoamerica. (2 parts, New York: Cambridge University Press, 2000).

[5] Nora C. England and Roberto Zavala Maldonado, “Mesoamerican Languages” Oxford Bibliographies

http://www.oxfordbibliographies.com/view/document/obo-9780199772810/obo-9780199772810-

0080.xml

(Accessed July 10, 2016)

[6] For an introduction to the nearly endless controversy over the pre- and post-contact population of

the Americas, see William M. Denevan (ed.), The Native Population of the Americas in 1492 (2d rev ed.,

Madison: University of Wisconsin Press, 1992).

[7] Sherburne F Cook and Woodrow Borah, Essays in Population History: Mexico and California

(Berkeley, CA: University of California Press, 1979), p. 159.

[8]Gene C. Wilken, Good Farmers Traditional Agricultural Resource Management in Mexico and Central

America (Berkeley: University of California Press, 1987), p. 24.

[9] Bernard Ortiz de Montellano, Aztec Medicine Health and Nutrition (New Brunswick, NJ: Rutgers

University Press, 1990).

[10] Bernardo García Martínez, “Encomenderos españoles y British residents: El sistema de dominio

indirecto desde la perspectiva novohispana”, in Historia Mexicana, LX: 4 [140] (abr-jun 2011), pp. 1915-

1978.

[11] These epidemics are extensively and exceedingly well documented. One of the most recent

examinations is Rodofo Acuna-Soto, David W. Stahle, Matthew D. Therrell , Richard D. Griffin, and

Malcolm K. Cleaveland, “When Half of the Population Died: The Epidemic of Hemorrhagic Fevers of

1576 in Mexico,” FEMS Microbiology Letters 240 (2004) 1–5. (http://

femsle.oxfordjournals.org/content/femsle/240/1/1.full.pdf, accessed July 10, 2016.) See in particular the

exceptional map and table on pp. 2-3.

[12] See in particular, Bernardo García Martínez. Los pueblos de la Sierra: el poder y el espacio entre los

indios del norte de Puebla hasta 1700 (Mexico, DF: El Colegio de México, 1987) and Elinor G.K. Melville, A

Plague of Sheep: Environmental Consequences of the Conquest of Mexico (New York: Cambridge

University Press, 1997).

[13] J. H. Elliott, “A Europe of Composite Monarchies,” Past & Present 137 (The Cultural and Political

Construction of Europe): 48–71; Guadalupe Jiménez Codinach, “De Alta Lealtad: Ignacio Allende y los

sucesos de 1808-1811,” in Marta Terán and José Antonio Serrano Ortega, eds., Las guerras de

independencia en la América Española (La Piedad, Michoacán, MX: El Colegio de Michoacán, 2002), p.

68.

[14] Richard Salvucci, “Capitalism and Dependency in Latin America,” in Larry Neal and Jeffrey G.

Williamson, eds., The Cambridge History of Capitalism (2 vols.), New York: Cambridge University Press,

2014), 1: pp. 403-408.

[15] Source: TePaske Page, http://www.insidemydesk.com/hdd.html (Accessed July 19, 2016)

[16] Edith Boorstein Couturier, The Silver King: The Remarkable Life of the Count of Regla in Colonial

Mexico (Albuquerque, NM: University of New Mexico Press, 2003). Dana Velasco Murillo, Urban Indians

in a Silver City: Zacatecas, Mexico, 1546-1810 (Stanford, CA: Stanford University Press, 2015), p. 43. The

standard work on the subject is David Brading, Miners and Merchants in Bourbon Mexico, 1763-1810

(New York: Cambridge University Press, 1971) But also see Robert Haskett, “Our Suffering with the

Taxco Tribute: Involuntary Mine Labor and Indigenous Society in Central New Spain,” Hispanic

American Historical Review, 71:3 (1991), pp. 447-475. For silver in China see

http://afe.easia.columbia.edu/chinawh/web/s5/s5_4.html (accessed July 13, 2016). For the rents of

empire question, see Michael Costeloe, Response to Revolution: Imperial Spain and the Spanish

American Revolutions, 1810-1840 (New York: Cambridge University Press, 1986).

[17] This is an estimate. David Ringrose concluded that in the 1780s, the colonies accounted for 45

percent of Crown income, and one would suppose that Mexico would account for at least about half of

that. See David R. Ringrose, Spain, Europe and the ‘Spanish Miracle’, 1700-1900 (New York: Cambridge

University Press, 1996), p. 93; Mauricio Drelichman, “The Curse of Moctezuma: American Silver and the

Dutch Disease,” Explorations in Economic History 42:3 (2005), pp. 349-380.

[18] José Antonio Escudero, El supuesto memorial del Conde de Aranda sobre la Independencia de

América) México, DF: Universidad Nacional Autónoma de México, 2014)

(http://bibliohistorico.juridicas.unam.mx/libros/libro.htm?l=3637, accessed July 13, 2016)

[19] Allan J. Kuethe and Kenneth J. Andrien, The Spanish Atlantic World in the Eighteenth Century. War

and the Bourbon Reforms, 1713-1796 (New York: Cambridge University Press, 2014) is the most recent

account of this period.

[20] Richard J. Salvucci, “Economic Growth and Change in Bourbon Mexico: A Review Essay,” The

Americas, 51:2 (1994), pp. 219-231; William B Taylor, Magistrates of the Sacred: Priests and Parishioners

in Eighteenth Century Mexico (Palo Alto: Stanford University Press, 1996), p. 24; Luis Jáuregui, La Real

Hacienda de Nueva España. Su Administración en la Época de los Intendentes, 1786-1821 (México, DF:

UNAM, 1999), p. 157.

[21] Jeremy Baskes, Staying Afloat: Risk and Uncertainty in Spanish Atlantic World Trade, 1760-1820

(Stanford, CA: Stanford University Press, 2013); Xabier Lamikiz, Trade and Trust in the Eighteenth-

century Atlantic World: Spanish Merchants and their Overseas Networks (Suffolk, UK: The Boydell Press.,

2013). The starting point of all these studies is Clarence Haring, Trade and Navigation between Spain and

the Indies in the Time of the Hapsburgs (Cambridge, MA: Harvard University Press, 1918).

[22] The best, and indeed, virtually unique starting point for considering these changes in their broadest

dimensions are the joint works of Stanley and Barbara Stein: Silver, Trade, and War (2003); Apogee of

Empire (2004), and Edge of Crisis (2010), All were published by Johns Hopkins University Press and do

for the Spanish Empire what Laurence Henry Gipson did for the First British Empire.

[23] The key work is María Eugenia Romero Sotelo, Minería y Guerra. La economía de Nueva España,

1810-1821 (México, DF: UNAM, 1997)

[24] Calculated from José María Luis Mora, Crédito Público ([1837] México, DF: Miguel Angel Porrúa,

1986), pp. 413-460. Also see Richard J. Salvucci, Politics, Markets, and Mexico’s “London Debt,” 1823-1887

(NY: Cambridge University Press, 2009).

[25] Jesús Hernández Jaimes, La Formación de la Hacienda Pública Mexicana y las Tensiones Centro

-Periferia, 1821-1835 (México, DF: El Colegio de México, 2013). Javier Torres Medina, Centralismo y

Reorganización. La Hacienda Pública Durante la Primera República Central de México, 1835-1842

(México, DF: Instituto Mora, 2013). The only treatment in English is Michael P. Costeloe, The Central

Republic in Mexico, 1835-1846 (New York: Cambridge University Press, 1993).

[26] An agricultural worker who worked full time, 6 days a week, for the entire year (a strong

assumption), in Central Mexico could have expected cash income of perhaps 24 pesos. If food, such as

beans and tortilla were added, the whole pay might reach 30. The figure of 40 pesos comes from

considerably richer agricultural lands around the city of Querétaro, and includes as an average income

from nonagricultural employment as well, which was higher. Measuring Worth would put the relative

historic standard of living value in 2010 prices at $1.040, with the caveat that this is relative to a bundle of

goods purchased in the United States.

(https://www.measuringworth.com/uscompare/relativevalue.php).

[27]The phrase comes from Guido di Tella and Manuel Zymelman. See Colin Lewis, “Explaining

Economic Decline: A review of recent debates in the economic and social history literature on the

Argentine,” European Review of Latin American and Caribbean Studies, 64 (1998), pp. 49-68.

[28] Francisco Téllez Guerrero, De reales y granos. Las finanzas y el abasto de la Puebla de los Angeles,

1820-1840 (Puebla, MX: CIHS, 1986). Pp. 47-79.

[29]This is based on an analysis of government lending contracts. See Rosa María Meyer and Richard

Salvucci, “The Panic of 1837 in Mexico: Evidence from Government Contracts” (in progress).

[30] There is an interesting summary of this data in U.S Govt., 57th Cong., 1 st sess., House, Monthly

Summary of Commerce and Finance of the United States (September 1901) (Washington, DC: GPO, 1901),

pp. 984-986.

[31] Salvucci, Politics and Markets, pp. 201-221.

[32] Miguel Galindo y Galindo, La Gran Década Nacional o Relación Histórica de la Guerra de Reforma,

Intervención Extranjera, y gobierno del archiduque Maximiliano, 1857-1867 ([1902], 3 vols., México, DF:

Fondo de Cultura Económica, 1987).

[33] Carmen Vázquez Mantecón, Santa Anna y la encrucijada del Estado. La dictadura, 1853-1855

(México, DF: Fondo de Cultura Económica, 1986).

[34] Moramay López-Alonso, Measuring Up: A History of Living Standards in Mexico, 1850-1950

(Stanford, CA: Stanford University Press, 2012); Amilcar Challú and Auroro Gómez Galvarriato,

“Mexico’s Real Wages in the Age of the Great Divergence, 1730-1930,” Revista de Historia Económica

33:1 (2015), pp. 123-152; Amílcar E. Challú, “The Great Decline: Biological Well-Being and Living

Standards in Mexico, 1730-1840,” in Ricardo Salvatore, John H. Coatsworth, and Amilcar E. Challú,

Living Standards in Latin American History: Height, Welfare, and Development, 1750-2000 (Cambridge,

MA: Harvard University Press, 2010), pp. 23-67.

[35]See Challú and Gómez Galvarriato, “Real Wages,” Figure 5, p. 101.

[36] Luis González et al, La economía mexicana durante la época de Juárez (México, DF: 1976).

[37] Teresa Rojas Rabiela and Ignacio Gutiérrez Ruvalcaba, Cien ventanas a los países de antaño:

fotografías del campo mexicano de hace un siglo) (México, DF: CONACYT, 2013), pp. 18-65.

[38] Alma Parra, “La Plata en la Estructura Económica Mexicana al Inicio del Siglo XX,” El Mercado de

Valores 49:11 (1999), p. 14.

[39] Sandra Kuntz Ficker, Empresa Extranjera y Mercado Interno: El Ferrocarril Central Mexicano (1880-

1907) (México, DF: El Colegio de México, 1995).

[40] Priscilla Connolly, El Contratista de Don Porfirio. Obras públicas, deuda y desarrollo desigual

(México, DF: Fondo de Cultura Económica, 1997).

[41] Most notably John Tutino, From Insurrection to Revolution in Mexico: Social Bases of Agrarian

Violence, 1750-1940 (Princeton, NJ: Princeton University Press, 1986). p. 229. My growth figures are based

on the INEGI, Estadísticas Historicas de México, 2014) (http://dgcnesyp.inegi.org.mx/cgi-

win/ehm2014.exe/CI080010, Accessed July 15, 2016).

[42] Stephen H. Haber, Industry and Underdevelopment: The Industrialization of Mexico, 1890-1940

(Stanford, CA: Stanford University Press, 1989); Aurora Gómez-Galvarriato, Industry and Revolution:

Social and Economic Change in the Orizaba Valley (Cambridge, MA: Harvard University Press, 2013).

[43] There are literally dozens of accounts of the Revolution. The usual starting point, in English, is Alan

Knight, The Mexican Revolution (reprint ed., 2 vols., Lincoln, NE: 1990).

[44] This argument has been made most insistently in Armando Razo and Stephen Haber, “The Rate of

Growth of Productivity in Mexico, 1850-1933: Evidence from the Cotton Textile Industry,” Journal of

Latin American Studies 30:3 (1998), pp. 481-517.

[45]Robert McCaa, “Missing Millions: The Demographic Cost of the Mexican revolution,” Mexican

Studies/Estudios Mexicanos 19:2 (Summer 2003): 367-400; Virgilio Partida-Bush, “Demographic

Transition, Demographic Bonus, and Ageing in Mexico, “ Proceedings of the United Nations Expert

Group Meeting on Social and Economic Implications of Changing Population Age Structures.

(http://www.un.org/esa/population/meetings/Proceedings_EGM_Mex_2005/partida.pdf) (Accessed

July 15, 2016), pp. 287-290.

[46] An implication of the studies of Alan Knight, and of Clark Reynolds, The Mexican Economy:

Twentieth Century Structure and Growth (New Haven, CT: Yale University Press, 1971).

[47] An interesting summary of revisionist thinking on the nature and history of the ejido appears in

Emilio Kuri, “La invención del ejido, Nexos, January 2015.

[48]Alan Knight, “Cardenismo: Juggernaut or Jalopy?” Journal of Latin American Studies, 26:1 (1994), pp.

73-107.

[49] Stephen Haber, “The Political Economy of Industrialization,” in Victor Bulmer-Thomas, John

Coatsworth, and Roberto Cortes-Conde, eds., The Cambridge Economic History of Latin America (2

vols., New York: Cambridge University Press, 2006), 2: 537-584.

[50]Again, there are dozens of studies of the Mexican economy in this period. Ros’ figures come from

“Mexico’s Trade and Industrialization Experience Since 1960: A Reconsideration of Past Policies and

Assessment of Current Reforms,” Kellogg Institute (Working Paper 186, January 1993). For a more

general study, see Juan Carlos Moreno-Brid and Jaime Ros, Development and Growth in the Me3xican

Economy. A Historical Perspective (New York: Oxford University Press, 2009). A recent Spanish language

treatment is Enrique Cárdenas Sánchez, El largo curso de la economía mexicana. De 1780 a nuestros días

(México, DF: Fondo de Cultura Económica, 2015). A view from a different perspective is Carlos Tello,

Estado y desarrollo económico. México 1920-2006 (México, DF, UNAM, 2007).

[51]André A. Hoffman, Long Run Economic Development in Latin America in a Comparative Perspective:

Proximate and Ultimate Causes (Santiago, Chile: CEPAL, 2001), p. 19.

[52]Tello, Estado y desarrollo, pp. 501-505.

[53] Mario Vargas Llosa, “Mexico: The Perfect Dictatorship,” New Perspectives Quarterly 8 (1991), pp. 23-

24.

[54] Rafael Izquierdo, Política Hacendario del Desarrollo Estabilizador, 1958-1970 (México, DF: Fondo

de Cultura Económica, 1995. The term stabilizing development was itself termed by Izquierdo as a

government minister.

[55]See Foreign Relations of the United States, 1964-1968. Mexico and Central America http://2001-

2009.state.gov/r/pa/ho/frus/johnsonlb/xxxi/36313.htm (Accessed July 15, 2016).

[56] José Aguilar Retureta, “The GDP Per Capita of the Mexican Regions (1895:1930): New Estimates,

Revista de Historia Económica, 33: 3 (2015), pp. 387-423.

[57] For a contemporary account with a sense of the immediacy of the end of the Echeverría regime, see

“Así se devaluó el peso,” Proceso, November 13, 1976.

[58] The standard account is Stephen Haber, Herbert Klein, Noel Maurer, and Kevin Middlebrook,

Mexico since 1980 (New York: Cambridge University Press, 2008). A particularly astute economic account

is Nora Lustig, Mexico: The Remaking of an Economy (2d ed., Washington, DC: The Brookings Institution,

1998). But also Louise E. Walker, Waking from the Dream. Mexico’s Middle Classes After 1968 (Stanford,

CA: Stanford University Press, 2013).

[59] See, for example, Jaime Ros Bosch, Algunas tesis equivocadas sobre el estancamiento económico de

México (México, DF: El Colegio de México, 2013).

[60] La Banca Central y la Importancia de la Estabilidad Económica June 16, 2008.

(http://www.banxico.org.mx/politica-monetaria-e-inflacion/material-de-

referencia/intermedio/politica-monetaria/%7B3C1A08B1-FD93-0931-44F8-96F5950FC926%7D.pdf,

Accessed July 15, 2016.). Also see Brian Winter, “This Man is Brilliant: So Why Doesn’t Mexico’s Economy

Grow Faster?” Americas Quarterly (http://americasquarterly.org/content/man-brilliant-so-why-

doesnt-mexicos-economy-grow-faster) (Accessed July 21, 2016)

Citation: Salvucci, Richard . “Mexico: Economic History” EH.Net Encyclopedia, edited by Robert

Whaples. July 30, 2016. URL http://eh.net/encyclopedia/the-economic-history-of-mexico/

Education and Economic Growth in HistoricalPerspective

David Mitch, University of Maryland Baltimore County

In his introduction to the Wealth of Nations, Adam Smith (1776, p. 1) states that the proportion between

the annual produce of a nation and the number of people who are to consume that produce depends on

“the skill, dexterity, and judgment with which its labour is generally applied.” In recent decades, analysts

of economic productivity in the United States during the twentieth century have made allowance for

Smith’s “skill, dexterity, and judgment” of the labor force under the rubric of labor force quality (Ho and

Jorgenson 1999; Aaronson and Sullivan 2001; DeLong, Goldin, and Katz 2003). These studies have found

that a variety of factors have influenced labor force quality in the U.S., including age structure and

workforce experience, female labor force participation, and immigration. One of the most important

determinants of labor force quality has been years of schooling completed by the labor force.

Data limitations complicate generalizing these findings to periods before the twentieth century and to

geographical areas beyond the United States. However, the rise of modern economic growth over the

last few centuries seems to roughly coincide with the rise of mass schooling throughout the world. The

sustained growth in income per capita evidenced in much of the world over the past two to two and a

half centuries is a marked divergence from previous tendencies. Kuznets (1966) used the phrase

“modern economic growth” to describe this divergence and he placed its onset in the mid-eighteenth

century. More recently, Maddison (2001) has placed the start of sustained economic growth in the early

nineteenth century. Maddison (1995) estimates that per capita income between 1520 and 1992 increased

some eight times for the world as a whole and up to seventeen times for certain regions. Popular

schooling was not widespread anywhere in the world before 1600. By 1800, most of North America,

Scandinavia, and Germany had achieved literacy rates well in excess of fifty percent. In France and

England literacy rates were closer to fifty percent and school attendance before the age of ten was

certainly widespread, if not yet the rule. It was not until later in the nineteenth century and the early

twentieth century that Southern and Eastern Europe were to catch up with Western Europe and it was

only the first half of the twentieth century that saw schooling become widespread through much of Asia

and Latin America. Only later in the twentieth century did schooling begin to spread throughout Africa.

The twentieth century has seen the spread of secondary and university education to much of the adult

population in the United States and to a lesser extent in other developed countries.[2] However,

correlation is not causation; rising income per capita may have contributed to rising levels of schooling,

as well as schooling to income levels. Thus, the contribution of rising schooling to economic growth

should be examined more directly.

Estimating the Contribution of the Rise of Mass Schooling toEconomic Growth: A Growth Accounting Perspective

Growth accounting can be used to estimate the general bounds of the contribution the rise of schooling

has made to economic growth over the past few centuries.[3] A key assumption of growth accounting is

that factors of production are paid their social marginal products. Growth accounting starts with

estimates of the growth of individual factors of production, as well as the shares of these factors in total

output and estimates of the growth of total product. It then apportions the growth in output into that

attributable to growth in each factor of production specified in the analysis and into that due to a

residual that cannot otherwise be explained. Estimates of how much schooling has increased the

productivity of individual workers, combined with estimates of the increase in schooling completed by

the labor force, yield estimates of how much the increase in schooling has contributed to increasing

output. A growth accounting approach offers the advantage that with basic estimates (or at least possible

ranges) for trends in output, labor force, schooling attainment, and preferably capital stock and factor

shares, it yields estimates of schooling’s contribution to economic growth. An important disadvantage is

that it relies on indirect estimates at the micro level for how schooling influences productivity at the

aggregate level, rather than on direct empirical evidence.[4]

Back-of-the-envelope estimates of increases in income per capita attributable to rising levels of

education over a period of a few centuries can be obtained by considering possible ranges of levels of

schooling increases as measured in average years of schooling along with possible ranges of rates of

return per year of schooling, in terms of the percentage by which a year of schooling raises earnings and

common ranges for labor’s share in national income. By using a Cobb-Douglas specification of the

aggregate production function with two factors of production, labor and physical capital, one can arrive

at the following equation for the ratio between final and initial national income per worker due to

increases in average school years completed between the two time periods:

1) (Y/L)1/ (Y/L)0 = ( (1 + r )S1 - S0 )�

Where Y = output, L = the labor force, r = the percent by which a year of schooling increases labor

productivity, S is the average years of schooling completed by the labor force in each time period, � is

labor’s share in national income, and the subscripts 0 and 1 denote the initial and final time period over

which the schooling changes occur.[5] This formulation is a partial equilibrium one, holding constant the

level of physical capital. However, the level of physical capital should be expected to increase in response

to improved labor force quality due to more schooling. A common specification of a growth model that

allows for such responses of physical capital implies the following ratio between final and initial national

income per worker (see Lord 2001, 99-100):

2) (Y/L)1/ (Y/L)0 = ( (1 + r )S1 - S0 )

The bounds on increases in years of schooling can be placed at between zero and 16, that is, between a

completely unschooled and presumably illiterate population to one in which a college education is

universal. As bounds on returns to increasing earnings per year of schooling, one can employ Krueger

and Lindahl’s (2001) survey of results from recent estimates of earnings functions, which finds that

returns range from 5 percent to 15 percent. The implications of varying these two parameters are

reported in Tables 1A and 1B. Table 1A reports estimates based on the partial equilibrium specification

holding constant the level of physical capital in equation 1). Table 1B reports estimates allowing for a

changing level of physical capital as in equation 2). Labor’s share of income has been set at a commonly

used value of 0.7 (see DeLong, Goldin and Katz 2003, 29; Maddison 1995, 255).

Table 1AIncrease in per Capita Income over a Base Level of 1 Attributable toHypothetical Increases in Average Schooling Levels � Holding the PhysicalCapital Stock Constant

Percent Increase in Earnings per Extra Year of Schooling

Increase in Average

Years of Schooling

5% 10% 15%

1 1.035 1.07 1.10

3 1.11 1.22 1.34

6 – illiteracy to

universal grammar school

.23 1.49 1.80

12 – illiteracy to

universal high school

1.51 2.23 3.23

16 – illiteracy to

universal college

1.73 2.91 4.78

Table 1BIncrease in per Capita Income over a Base Level of 1 Attributable toHypothetical Increases in Average Schooling Levels � Allowing for Steady-state Changes in the Physical Capital Stock

Percent Increase in Earnings per Extra Year of Schooling

Increase in Average

Years of Schooling

5% 10% 15%

1 1.05 1.10 1.15

3 1.16 1.33 1.52

6 – illiteracy to

universal grammar school

1.34 1.77 2.31

12 – illiteracy to

universal high school

1.79 3.14 5.35

16 – illiteracy to

universal college

2.18 4.59 9.36

The back-of-the-envelope calculations in Tables 1A and 1B make two simple points. First, schooling

increases have the potential to explain a good deal of estimated long-term increases in per capita

income. With the average member of an economy’s labor force embodying investments of twelve years

of schooling and a moderate ten-percent rate of return per year of schooling and no increase in the

capital stock, at least 17 percent of Maddison’s eight-fold increase in per capita income can be accounted

for (i.e. 1.23/7) by rising schooling. Indeed, a 16 year schooling increase allowing for steady-state capital

stock increases and at 15 percent per year return overexplains Maddison’s eight-fold increase (8.36/7).

After all, if schooling has had substantial effects on the productivity of individual workers, if a sizable

share of the labor force has experienced improvements in schooling completed and with labor’s share of

output greater than half, then the contribution of rising schooling to increasing output should be large.

Second, the contribution of schooling increases that have actually occurred historically to per capita

income increases is more modest accounting for at best about one fifth of Maddison’s one-fold increase.

Thus an increase in average years of schooling completed by the labor force of 6 years, roughly that

entailed by the spread of universal grammar schooling, would account for 19 percent (1.31/7) of an

eight-fold per capita output increase at a high 15 percent rate of return allowing for steady state changes

in the physical capital stock (Table 1B). And at a low 5 percent return per year of schooling, the

contribution would be only 5 percent of the increase (0.34/7). Making lower-level elementary education

universal would entail increasing average years of schooling completed by the labor force by 1 to 3 years;

in most circumstances this is not a trivial accomplishment as measured by the societal resources

required. However, even at a high 15 percent per year return and allowing for steady state changes in the

capital stock (Table 1B), the contribution of a 3 year increase in average years of schooling would only

account for 7 percent (0.52/7) of Maddison’s eight-fold increase.

How do the above proposed bounds on schooling increases compare with possible increases in the

physical capital stock? Kendrick (1993, 143) finds a somewhat larger growth rate in his estimated human

capital stock than in the stock of non-human capital for the U.S. between 1929 and 1969, though for the

sub-period 1929-48, he estimates a slightly higher growth rate for the non-human capital stock. In

contrast, Maddison (1995, 35-37) estimates larger increases in the value of non-residential structures per

worker and in the value of machinery and equipment per worker than in years of schooling per adult for

the U.S. and the U.K. between 1820 and 1992. For the U.S., he estimates that the value of non-residential

structures per worker rose by 21 times and the value of machinery and equipment per worker rose by

141 times in comparison with a ten-fold increase in the years of schooling per adult between 1820 and

1992. For the U.K., his estimates indicate a 15 fold increase in the value of structures per worker and a 97

fold increase in value of machinery and equipment per worker in contrast with a seven-fold increase in

average years of schooling between 1820 and 1992. It should be noted that these estimates are based on

cumulated investments in schooling to estimate human capital; that is, they are based on the costs

incurred to produce human capital. Davies and Whalley (1991, 188-189) argue that estimates based on

the alternative approach of calculating the present value of future earnings premiums attributable to

schooling and other forms of human capital yield substantially higher estimates of human capital due to

capturing inframarginal returns above costs accruing to human capital investments. For the growth

accounting approach employed here, the cumulated investment or cost approach would seem the

appropriate one. Are there more inherent bounds on the accumulation of human capital over time than

non-human capital? One limit on the accumulation of human capital is set by how much of one’s

potential working life a worker is willing to sacrifice for purposes of improving education and future

productivity. This can be compared with the corresponding limit on the willingness to sacrifice current

consumption for wealth accumulation.

However, this discussion makes no explicit allowance for changes over time in the quality of schooling.

Improvements in teacher training and teacher recruitment along with ongoing curriculum developments

among other factors could lead to ongoing improvements over time in how much a year of school

attendance would improve the underlying future productivity of the student. Woessmann (2002) and

Hanushek and Kimcoe (2000) have recently argued for the importance of allowing for variation in school

quality in estimating the impact of cross national variation in human capital levels on economic growth.

Woessmann (2002) makes the suggestion that allowing for improvements in the quality of schooling can

remove the upper bounds on schooling investment that would be present if this was simply a matter of

increasing the percentage of the population enrolled in school at given levels of quality. While there

would seem to be inherent bounds on the proportion of one’s life that one is willing to spend in school,

such bounds would not apply to increases in expenditures and other means of improving school quality.

Expenditures per pupil appear to have risen markedly over long periods of time. Thus, in the United

States, expenditure per pupil in public elementary and secondary schools in constant 1989-90 dollars

rose by over 6 times between 1923-24 and 1973-74 (National Center for Educational Statistics, 60). And in

Victorian England, nominal expenditures per pupil in state subsidized schools more than doubled

between 1870 and 1900, despite falling prices (Mitch 1982, 204). These figures do not control for the rising

percentage of students enrolled in higher grade levels (presumably at higher expenditure per student),

general rises in living standards affecting teachers’ salaries and other factors influencing the abilities of

those recruited into teaching. Nevertheless, they suggest the possibility of sizable improvements over

time in school quality.

It can be argued that implicitly allowance is made for improvements in school quality in the rate of

return imputed per year of schooling completed on average by the labor force. Insofar as schools

became more effective over time in transmitting knowledge and skills, the economic return per year of

schooling should have increased correspondingly. Thus any attempt to allow for school quality in a

growth accounting analysis should be careful to avoid double counting school quality in both school

inputs and in returns per year of schooling.

The benchmark for the impact of increases in average levels of schooling completed in Table 1 are

Maddison’s estimates of changes in output per capita over the last two centuries. In fact, major increases

in schooling levels have most commonly been compressed into intervals of several decades or less,

rather than periods of a century or more. This would imply that the contribution to output growth of

improvements in labor force quality due to increases in schooling levels would have been concentrated

primarily in periods of marked improvement in schooling levels and would have been far more modest

during periods of more sluggish increase in educational attainment. In order to gauge the impact of the

time interval over which changes in schooling occur on growth rates of output, Table 2 provides the

change in average years of schooling implied by some of the hypothetical changes in average levels of

schooling attainment reported in Table 1 for various time periods.

Table 2

Annual Change in Average Years of Schooling per Adult per Year Implied by Hypothetical Figures

in Table 1

Time period over which increase occurred

Total Increase in

Average Years of

Schooling per Adult

5 years 10 years 30 years 50 years 100 years

1 0.2 0.1 0.033 0.02 0.01

3 0.6 0.3 0.1 0.06 0.03

6 1.2 0.6 0.2 0.12 0.06

9 1.8 0.9 0.3 0.18 0.09

Table 3 translates these rates of schooling growth into output growth rates using the partial equilibrium

framework of equation 1) using a value for the share of labor of 0.7 as above. The contribution of

schooling to growth rates of output and output per capita can be calculated as labor’s share times the

percentage return per year of schooling on earnings times the annual increase in average years of

schooling.

Table 3AContribution of Schooling for Large Increases in Schooling to Annual GrowthRates of Output

Length of time for

schooling increase

6 year rise in average

years of schooling

6 year rise in average

years of schooling

9 year rise in average

years of schooling

9 year rise in average

years of schooling

5% return 10 % return 5 % return 10% return

30 years 0.7% 1.4% 1.05% 2.1%

50 years 0.42% 0.84% 0.63% 1.26%

Table 3BContribution of Schooling for Small to Modest Increases in Schooling toAnnual Growth Rates of Output

Length of time for

schooling increase

1 year rise in average

years of schooling

1 year rise in average

years of schooling

3 year rise in average

years of schooling

3 year rise in average

years of schooling

5 % return 10 % return 5% return 10% return

5 years 0.7% 1.4% 2.1% 4.2%

10 years 0.35% 0.7% 1.05% 2.1%

20 years 0.175% 0.35% 0.525% 1.05%

30 years 0.12% 0.23% 0.35% 0.7%

50 years 0.07% 0.14% 0.21% 0.42%

100 years 0.035% 0.07% 0.105% 0.21%

The case of the U.S. in the twentieth century as analyzed in DeLong, Goldin and Katz (2003) offers an

example of how apparent limits or at least resistance to ongoing expansion of schooling have lowered

the contribution of schooling to growth. They find that between World War I and the end of the century,

improvements in labor quality attributable to schooling can account for about a quarter of the growth of

output per capita in the U.S. during this period; this is similar in magnitude to Denison’s (1962) estimates

for the first part of this period. This era saw the mean years of schooling completed by age 35 increased

from 7.4 years for an American born in 1875 to 14.1 years for an American born in 1975 (DeLong, Goldin

and Katz 2003, 22). However, in the last two decades of the twentieth century the rate of increase of

mean years of schooling completed leveled off and correspondingly the contribution of schooling to

labor quality improvements fell almost in half.

Maddison (1995) has compiled estimates of the average years of schooling completed for a number of

countries going back to 1820. It is indicative of the sparseness of schooling completed by adult

population estimates that Maddison reports estimates for only 3 countries, the U.S., the U.K., and Japan,

all the way back to 1820. Maddison’s figures come from other studies and their reliability warrants

further critical scrutiny than can be accorded them here. Since systematic census evidence on adult

educational attainment did not begin until the mid-twentieth century, estimates of labor force

educational attainment prior to 1900 should be treated with some skepticism. Nevertheless, Maddison’s

estimates can be used to give a sense of plausible changes in levels of schooling completed over the last

century and a half. The average increases in years of schooling per year for various time periods implied

by Maddison’s figures are reported in Table 4. Maddison constructed his figures by giving primary

education a weight of 1, secondary education a weight of 1.4, and tertiary, a weight of 2 based on

evidence on relative earnings for each level of education.

Table 4Estimates of the Annual Change in Average Years of Schooling per Person aged15-64 for Selected Countries and Time Periods

Country 1913-19731870-19731870-1913

U.S. 0 .112 0.107 0.092

France 0.0783

Germany 0.053

Netherlands0.064

U.K. 0.0473 0.0722 0.102

Japan 0.112 0.106 0.090

Source: Maddison (1995), 37, Table 2-3

Table 5Annual Growth Rates in GDP per Capita

Region 1820-701870-19131913-501950-731973-92

12 West European Countries0.9 1.3 1.2 3.8 1.8

4 Western Offshoots 1.4 1.5 1.3 2.4 1.2

5 South European Countriesn.a. 0.9 0.7 4.8 2.2

7 East European Countries n.a. 1.2 1.0 4.0 -0.8

7 Latin American Countries n.a. 1.5 1.9 2.4 0.4

11 Asian Countries 0.1 0.7 -0.2 3.1 3.5

10 African countries n.a. n.a. 1.0 1.8 -0.4

Source: Maddison (1995), 62-63, Table 3-2.

In comparing Tables 2 and 4 it can be observed that the estimated actual changes in years of schooling

compiled by Maddison (as well as the average over 55 countries reported by Lichtenberg (1994) for the

third quarter of the twentieth century) fall within a lower bound set in the hypothetical ranges of a 3 year

increase in average schooling spread over a century and an upper bound set by a 6 year increase in

average schooling spread over 50 years.

Equations 1) and 2) above assume that each year of schooling of a worker has the same impact on

productivity. In fact it has been common to find that the impact of schooling on productivity varies

according to level of education. While the rate of return as a percentage of costs tends to be higher for

primary than secondary schooling, which is in turn higher than tertiary education, this reflects the far

lower costs, especially lower foregone earnings, of primary schooling (Psacharopolous and Patrinos

2004). The earnings premium per year of schooling tends to be higher for higher levels of education and

this earnings premium, rather than the rate of return as a percentage costs, is the appropriate measure

for assessing the contribution of rising schooling to growth (OECD 2001). Accordingly growth accounting

analyses commonly construct schooling indexes weighting years of schooling according to estimates of

each year’s impact on earnings (see for example Maddison 1995; Denison 1962). DeLong, Goldin and

Katz (2003) use chain weighted indexes of returns according to each level of schooling. A rough

approximation of the effect of allowing for variation in economic impact by level of schooling in the

analysis in Table 1 is simply to focus on the mid-range 10 percent rate of return as an approximate

average of high, low, and medium level returns.[6]

The U.S. is notable for rapid expansion in schooling attainment over the twentieth century at both the

secondary and tertiary level, while in Europe widespread expansion has tended to focus on the primary

and lower secondary level. These differences are evident in Denison’s estimates of the actual differences

in educational distribution between the United States and a number of Western European countries in

the mid-twentieth century (see Table 6).

Table 6

Percentage Distributions of the Male Labor Force by Years of Schooling Completed

Years of School

Completed

United States 1957 France 1954 United Kingdom

1951

Italy 1961

0 1.4 0.3 0.2 13.7

1-4 5.7 2.4 0.2 26.1

5-6 6.3 19.2 0.8 38.0

7 5.8 21.1 4.0 4.2

8 17.2 27.8 27.2 8.1

9 6.3 4.6 45.1 0.7

10 7.3 4.1 8.4 0.7

11 6.0 6.5 7.3 0.6

12 26.2 5.4 2.5 1.8

13-15 8.3 5.4 2.2 3.0

16 or more 9.5 3.2 2.1 3.1

Source: Denison (1967), 80, Table 8-1.

Some segments of the population are likely to have much greater enhancements of productivity from

additional years of schooling than others. Insofar as the more able benefit from schooling compared to

the rest of the ability distribution, putting substantially greater relative emphasis on expansion of higher

levels of schooling could considerably augment growth rates over a more egalitarian strategy. This result

would follow from a substantially greater premium assigned to higher levels of education. However,

some studies of education in developing countries have found that they allocate a disproportionate share

of resources to tertiary schooling at the expense of primary schooling, reflecting efforts of elites to

benefit their offspring. How this has impeded economic growth would depend on the disparity in rates

of return among levels of education, a point of some controversy in the economics of education

literature (Birdsall 1996; Psacharopoulos 1996).

While allocating schooling disproportionately towards the more able in a society may have promoted

growth, there would have been corresponding losses stemming from groups that have been

systematically excluded or at least restricted in their access to education due to discrimination by factors

such as race, gender and religion (Margo 1990). These losses could be attributed in part to the presence

of individuals of high ability in groups experiencing discrimination due to failure to provide them with

sufficient education to properly utilize their talents. However, historians such as Ashton (1948, 15) have

argued that the exclusion of non-Anglicans from English universities prior to the mid-nineteenth century

resulted in the channeling of their talents into manufacturing and commerce.

Even if returns have been higher at some levels of education than others, a sustained and substantial

increase in labor force quality would seem to entail an egalitarian strategy of widespread increase in

access to schooling. The contrast between the rapid increase in access to secondary and tertiary

schooling in the U.S. and the much more limited increase in access in Europe during the twentieth

century with the correspondingly much greater role for schooling in accounting for economic growth in

the U.S. than in Europe (see Denison 1967) points to the importance of an egalitarian strategy in

sustaining ongoing increases in aggregate labor force quality.

One would expect on increase in the relative supply of more schooled labor to lead to a decline in the

premium to schooling, other things equal. Some recent analyses of the contribution of schooling to

growth have allowed for this by specifying a parametric relationship between the distribution of

schooling in an economy’s labor force and its impact on output or on a hypothesized intermediary

human capital factor (Bils and Klenow 2000).[7]

Direct empirical evidence on trends in the premium to schooling is helpful both to obviate reliance on a

theoretical specification and to allow for factors such as technical change that may have offset the

impact of the increasing supply of schooling. Goldin and Katz (2001) have developed evidence on trends

in the premium to schooling over the twentieth century that have allowed them to adjust for these

trends in estimating the contribution of schooling to economic growth (DeLong, Goldin and Katz 2003).

They find a marked fall in the premium to schooling, roughly falling in half between 1910 and 1950.

However, they also find that this decline in the schooling premium was more than offset by their

estimated increase over this same period in years of schooling completed by the average worker of 2.9

years and hence that on net schooling increases contributed to improved productivity of the U.S.

workforce. They estimate increases of 0.5 percent per year in labor productivity due to increased

educational attainment between 1910 and 1950 relative to the average total annual increase in labor

productivity of 1.62 percent over the entire period 1915 to 2000. For the period since 1960, DeLong,

Goldin and Katz find that the premium to education has increased while the increase in educational

attainment at first increased and then declined. During this latter period, the increase in labor force

quality has declined, as noted above, despite a widening premium to education, due to the slowing down

in the increase in educational attainment.

Classifying the Range of Possible Relationships between Schooling and Economic Growth

In generalizing beyond the twentieth-century U.S. experience, allowance should be made both for the

role of influences other than education on economic growth and for the possibility that the impact of

education on growth can vary considerably according to the historical situation. In fact to understand

why and how education might contribute to economic growth over the range of historical experience, it

is important to investigate the variation in the impact of education on growth that has occurred

historically. In relating education to economic growth, one can distinguish four basic possibilities.

The first is one of stagnation in both educational attainment and in output per head. Arguably, this was

the most common situation throughout the world until 1750 and even after that date characterized

Southern and Eastern Europe through the late nineteenth century, as well as most of Africa, Asia, and

Latin American through the mid-twentieth century. The qualifier “arguably” is inserted here, because

this view of the matter almost surely makes inadequate allowance for the improvements in informal

acquisition of skills through family transmission and direct experience as well as through more formal

non-schooling channels such as guild-sponsored apprenticeships, an aspect to be taken up further

below. It also makes no allowance for the possible long-term improvements in per capita income that

took place prior to 1750 but have been inadequately documented. Still focusing on formal schooling as

the source of improvement in labor force, there is reason to think that this may have been a pervasive

situation throughout much of human history.

The second situation is one in which income per capita rose despite stagnating education levels; factors

other than improvements in educational attainment were generating economic growth. England during

its industrial revolution, 1750 to 1840 is a notable instance in which some historians have argued that this

situation prevailed. During this period, English schooling and literacy rates rose only slightly if at all, while

income per capita appears to have risen. Literacy and schooling appears to have been of little use in

newly created manufacturing occupations such as in cotton spinning. Indeed, literacy rates and

schooling actually appears to have declined in some of the most rapidly industrializing areas of England

such as Lancashire (Sanderson 1972; Nicholas and Nicholas 1992). Not all have concurred with this

interpretation of the role of education in the English industrial revolution and the result depends on how

educational trends are measured and how education is specified as affecting output (see Laqueur; Crafts

1995; Mitch 1999). Moreover this makes no allowance for the role of informal acquisition of skills. Boot

(1995) argues that in the case of cotton spinners, informal skill acquisition with experience was

substantial.

The simplest interpretation of this situation is that other factors contributed to economic growth other

than schooling or human capital more generally. The clearest non-human capital explanatory factor

would perhaps be physical capital accumulation; another might be foreign trade. However, if one turns

to technological advance as a driving force, then this gives rise to the possibility that human capital � at

least broadly defined � was if not the underlying force at least a central contributing factor to the

industrial revolution. The argument for this possibility is that the improvements in knowledge and skills

associated with technological advance are embodied in human agents and hence are forms of human

capital. Recent work by Mokyr (2002) would suggest this interpretation. Nevertheless, the British

industrial revolution does remain as a prominent instance in which human capital conventionally

defined as schooling stagnated in the presence of a notable upsurge in economic growth. A less extreme

case is provided by the post-World War II European catch-up with the United States, as Denison’s (1967)

growth accounting analysis indicates that this occurred despite slower European increases in educational

attainment due to other factors offsetting this. Historical instances such as that of the British industrial

revolution call into question the common assumption that education is a necessary prerequisite for

economic growth (see Mitch 1990).

The third situation is one in which rising educational attainment corresponds with rising rates of

economic growth. This is the situation one would expect to prevail if education contributes to economic

productivity and if any negative factors are not sufficient to offset this influence. One sub-set of instances

would be those in which very large and reasonably compressed increases in the educational attainment

of the labor force occurred. One important example of this is the twentieth century U.S., with the high

school movement followed by increases in college attendance, as noted above. Another would be those

of certain East Asian economies since World War II, as documented in the growth accounting analysis by

Young (1995) of the substantial contributions of their rising educational attainment to their rapid growth

rates. Another sub-set of cases corresponding to more modest increases in schooling can be interpreted

as applying either to countries experiencing schooling increases focussed at the elementary level, as in

much of Western Europe over the nineteenth century. The so-called literacy campaigns, as in the Soviet

Union and Cuba (see Arnove and Graff eds. 1987) in the early and mid-twentieth century with modest

improvements in educational attainment over compressed time periods of just a few decades could also

be viewed as fitting into this sub-category. However, whether there were increases in output per capita

corresponding to these more modest increases in educational attainment remains to be established.

The fourth situation is one in which economic growth has stagnated despite the presence of marked

improvements in educational attainment. Possible examples of this situation would include the early rise

of literacy in some Northern European areas, such as Scotland and Scandinavia, in the seventeenth and

eighteenth centuries (see Houston 1988; Sandberg 1979) and some regions of Africa and Asia in the later

twentieth century (see Pritchett 2001). One explanation of this situation is that it reflects instances in

which any positive impact of educational attainment is small relative to other influences having an

adverse impact. But one can also interpret it as reflecting situations in which incentive structures direct

educated people into destructive and transfer activities inimical to economic growth (see North 1990;

Baumol 1990; Murphy, Shleifer, and Vishny 1991).

Cross-country studies of the relationship between changes in schooling and growth since 1960 have

yielded conflicting results which in itself could be interpreted as supporting the presence of some mix of

the four situations just surveyed. A number of studies have found at best a weak relationship between

changes in schooling and growth (Pritchett 2001; Bils and Klenow 2000); others have found a stronger

relationship (Topel 1999). Much seems to depend on issues of measurement and on how the relationship

between schooling and output is specified (Temple 2001b; Woessmann 2002, 2003).

The Determinants of Schooling

Whether education contributes to economic growth can be seen as depending on two factors, the extent

to which educational levels improve over time and the impact of education on economic productivity.

The first factor is a topic for extended discussion in its own right and no attempt will be made to

consider it in depth here. Factors commonly considered include rising income per capita, distribution of

political power, and cultural influences (Goldin 2001, Lindert 2004, Mariscal and Sokoloff 2000, Easterlin

1981; Mitch 2004). The issue of endogeneity of determination has often been raised with respect to the

determinants of schooling. Thus, it is plausible that rising income contributes to rising levels of schooling

and that the spread of mass education can influence the distribution of political power as well as the

reverse. While these are important considerations, they are sufficiently complex to warrant extended

attention in their own right.[8]

Influences on the Economic Impact of Schooling

Insofar as schooling improves general human intellectual capacities, it could be seen as having a

universal impact irrespective of context. However, Rosenzweig (1995; 1999) has noted that the even the

general influence of education on individual productivity or adaptability depend on the complexity of the

situation. He notes that for agricultural tasks primarily involving physical exertion, no difference in

productivity is evident between workers according to education levels; however, in more complex

allocative decisions, education does enhance performance. This could account for findings that literacy

rates were low among cotton spinners in the British industrial revolution despite findings of substantial

premiums to experience (Sanderson 1972; Boot 1995). However, other studies have found literacy to

have a substantial positive impact on labor productivity in cotton textile manufacture in the U.S., Italy,

and Japan (Bessen 2003; A’Hearn 1998, Saxonhouse 1977) and have suggested a connection between

literacy and labor discipline.

A more macro influence is the changing sectoral composition of the economy. It is common to suggest

that the service and manufacturing sector have more functional uses for educated labor than the

agricultural sector and hence that the shift from agriculture to industry in particular will lead to greater

use of educated labor and in turn to require more educated labor forces. However, there are no clear

theoretical or empirical grounds for the claim that agriculture makes less use of educated labor than

other sectors of the economy. In fact, farmers have often had relatively high literacy rates and there are

more obvious functional uses for education in agriculture in keeping accounts and keeping up with

technological developments than in manufacturing. Nilsson et al (1999) argue that the process of

enclosure in nineteenth-century Sweden, with the increased demands for reading and writing land

transfer documents that this entailed, increased the value of literacy in the Swedish agrarian economy.

The findings noted above that those in cotton textile occupations associated with early industrialization

in Britain had relatively low literacy rates is one indication of the lack of any clear cut ranking across

broad economic sectors in the use of educated labor.

Changes in the organization of decision making within major sectors as well as changes in the

composition of production within sectors are more likely to have had an impact on demands for

educated labor. Thus, within agriculture the extent of centralization or decentralization of decision

making, that is the extent to which farm work forces consisted of farmers and large numbers of hired

workers or of large numbers of peasants each with scope for making allocative decisions, is likely to have

affected the uses made of educated labor in agriculture. Within manufacturing, a given country’s

endowment of skilled relative to unskilled labor has been seen as influencing the extent to which

openness to trade increases skill premiums, though this entails endogenous determination (Wood 1995).

Technological advance would have tended to boost the demand for more skilled and educated labor if

technological advance and skills are complementary, as is often asserted.

However, there is no theoretical reason why technology and skills need be complementary and indeed

concepts of directed technological change or induced innovation would suggest that in the presence of

relatively high skill premiums, technological advance would be skill saving rather than skill using. Goldin

and Katz (1998) have argued that the shift from the factory to continuous processing and batch

production associated with the shift of power sources from steam to electricity in the early twentieth

century lead to rising technology skill complementarity in U.S. manufacturing. It remains to be

established how general this trend has been. It could be related to the distinction made between the

dominance in the United States of extensive growth in the nineteenth century due to the growth of

factors of production such as labor and capital and the increasing importance of intensive growth in the

twentieth century. Intensive growth is often associated with technological advance and a presumed

enhanced value for education (Abramovitz and David 2000). Some analysts have emphasized the

importance of capital-skill complementarity. For example, Galor and Moav (2003) point to the level of

the physical capital stock as a key influence on the return to human capital investment; they suggest that

once physical capital stock accumulation surpassed a certain level, the positive impact of human capital

accumulation on the return to physical capital became large enough that owners of physical capital

came to support the rise of mass schooling. They cite the case of schooling reform in early twentieth

century Britain as an example.

Even sharp declines in the premiums to schooling do not preclude a significant impact of education on

economic growth. DeLong, Goldin and Katz’s (2003) growth accounting analysis for the twentieth

century U.S. makes the point that even at modest positive returns to schooling on the order of 5 percent

per year of schooling, with large enough increases in educational attainment, the contribution to growth

can be substantial.

Human Capital

Economists have generalized the impact of schooling on labor force quality into the concept of human

capital. Human capital refers to the investments that human beings make in themselves to enhance their

economic productivity. These investments can take on many forms and include not only schooling but

also apprenticeship, a healthy diet, and exercise, among other possibilities. Some economists have even

suggested that more amorphous societal factors such as trust, institutional tradition, technological know

how and innovation can all be viewed as forms of human capital (Temple 2001a; Topel 1999; Mokyr

2002). Thus broadly defined, human capital would appear as a prime candidate for explaining much of

the difference across nations and over time in output and economic growth. However, gaining much

insight into the actual magnitudes and the channels of influence by which human capital might influence

economic growth requires specification of both the nature and determinants of human capital and how

human capital affects aggregate production of an economy.

Much of the literature on human capital and growth makes the implicit assumption that some sort of

numerical scale exists for human capital, even if multidimensional and even if unobservable. This in turn

implies that it is meaningful to relate levels and changes of human capital to levels of income per capita

and rates of economic growth. Given the multiplicity of factors that influence human knowledge and skill

and in turn how these influence labor productivity, difficulties would seem likely to arise with attempts to

measure aggregate human capital similar to those that have arisen with attempts to specify and measure

the nature of human intelligence. Woessmann (2002, 2003) provides useful surveys of some of the issues

involved in attempting to specify human capital at the aggregate level appropriate for relating it to

economic growth.

One can distinguish between approaches to the measurement of human capital that focus on schooling,

as in the discussion above, and those that take a broader view. Broad view approaches try to capture all

investments that may have improved human productivity from whatever source, including not just

schooling but other productivity enhancing investments, such as on-the-job training. The basic premise

of broad view approaches is that for an aggregate economy, the income going to labor over and above

what that labor would earn if it were paid the income of an unskilled worker can be viewed as human

capital. This measure can be constructed in various ways including as a ratio using unskilled labor

earnings as the denominator as in Mulligan and Sala-I-Martin (1997) or using the share of labor income

not going as compensation for unskilled labor as in Crafts (1995) and Mitch (2004). Mulligan and Sala-I-

Martin (2000) point to some of the major index number problems that can arise in using this approach to

aggregate heterogeneous workers.

Crafts and Mitch find that for Britain during its late eighteenth and early nineteenth century industrial

revolution between one-sixth and one-fourth of income per capita can be attributed to human capital

measured as the share of labor income not going as compensation for unskilled labor.

One approach that has been taken recently to estimate the role of human capital differences in

explaining international differences in income per capita is to consider changes in immigrant earnings

between origin and destination countries along with differences between immigrant and native workers

in the destination country. Olson (1996) suggested that the large increase in earnings of immigrants

commonly observed in moving from a low income to a high income country points to a small role for

human capital in explaining the wide variation in per capita income across countries. Hendricks (2002)

has used differences between immigrant and native earnings in the U.S. to estimate the contribution of

otherwise unobserved skill differences to explaining differences in income per capita across countries

and finds that they account for only a small part of the latter differences. Hendricks’ approach raises the

issue of whether there could be long-term increases in otherwise unobserved skills that could have

contributed to economic growth.

The Informal Acquisition of Human Capital

One possible source of such skills is through the informal acquisition of human capital through on-the-

job experience. Insofar as work has been common from early adolescence onwards, the issue arises of

why the aggregate stock of skills acquired through experience would vary over time and thus influence

rates of economic growth. Some types of on-the-job experience which contribute to economic

productivity, such as apprenticeship, may entail an opportunity cost and aggregate trends in skill

accumulation will be influenced by societal willingness to incur such opportunity costs.

Insofar as schooling continues through adolescence, this can interfere with the accumulation of

workforce experience. DeLong, Goldin and Katz (2003) note the tradeoff between rising average years of

schooling completed and decreasing years of labor force experience in influencing labor force quality of

the U.S. labor force in the last half of the twentieth century. Connolly (2004) has found that informal

experience played a relatively greater role in Southern economic growth than for other regions of the

United States.

Hansen (1997) has also distinguished the academically-oriented secondary schooling the United States

developed in the late nineteenth and early twentieth century from the vocationally-oriented schooling

and apprenticeship system that Germany developed over the same time period. Goldin (2001) argues

that in the United States the educational system developed general abilities suitable for the greater

opportunities for geographical and occupational mobility that prevailed there, while specific vocational

training was more suitable for the more restricted mobility opportunities in Germany.

Little evidence exists on whether long-term trends in informal opportunities for skill acquisition have

influenced growth rates. However, Smith’s (1776) view of the importance of the division of labor in

influencing productivity would suggest that the impact of trends in these opportunities may well have

been quite sizable.

Externalities from Education

Economists commonly claim that education yields benefits to society over and above the impact on

labor market productivity perceived by the person receiving the education. These benefits can include

impacts on economic productivity, such as impacts on technological advance. They can also include

non-labor market benefits. Thus McMahon (2002, 11) in his assessment of the social benefits of

education includes not only direct effects on economic productivity but also impacts on a) population

growth rates and health b) democratization, political stability, and human rights, c) the environment, d)

reduction of poverty and inequality, e) crime and drug use, and f) labor force participation. While these

effects may appear to involve primarily non-market activity and thus would not be reflected in national

output measures and growth rates, factors such as political stability, democratization, population

growth, and health have obvious consequences for prospects for long-term growth. However, allowance

should be made for the simultaneous influence of the distribution of political power and life expectancy

on societal investments in schooling.

For the period since 1960, numerous studies have employed cross country variation in various estimates

of human capital and income per capita to directly estimate the impact of human capital on levels of

income per capita and growth. A central goal of many such estimates is to see if there are externalities to

education on output over and above the private returns estimated from micro data. The results have

been conflicting and this has been attributed not only to problems of measurement error but also to

differences in specification of human capital and its impact on growth. There does not appear to be

strong evidence of large positive externalities to human capital (Temple 2001a). Furthermore, McMahon

(2004) reports some empirical specifications which yield substantial indirect long-run effects.

For the period before 1960, limits on the availability of data on schooling and income have limited the

use of this empirical regression approach. Thus, any discussion of the impact of externalities of

education on production is considerably more conjectural. The central role of government, religious,

and philanthropic agencies in the provision of schooling suggests the presence of externalities. Politicians

and educators more frequently justified government and philanthropic provision of schooling by its

impacts on religious and moral behavior than by any market failure resulting in sub-optimal provision of

schooling from the standpoint of maximizing labor productivity. Thus, Adam Smith in his discussion of

mass schooling in The Wealth of Nations, places more emphasis on its value to the state in enhancing

orderliness and decency while reducing the propensity to popular superstition than on its immediate

value in enhancing the economic productivity of the individual worker.

The Impact of the Level of Human Capital on Rates of EconomicGrowth

The approaches considered thus far relate changes in educational attainment of the labor force to

changes in output per worker. An alternative, though not mutually exclusive, approach is to relate the

level of educational attainment of an economy’s labor force to its rate of economic growth. The

argument for doing so is that a high but unchanging level of educational attainment should contribute to

growth by facilitating creativity, innovation and adaptation to change as well as facilitating the ongoing

maintenance and improvement of skill in the workforce. Topel (1999) has argued that there may not be

any fundamental difference between the two types of approach insofar as ongoing sources of

productivity advance and adaptation to change could be viewed as reflecting ongoing improvements in

human capital. Nevertheless, some empirical studies based on international data for the late twentieth

century have found that a country’s level of educational attainment has a much stronger impact on its

rate of economic growth than its rate of improvement in educational attainment (Benhabib and Spiegel

1994).

The paucity of data on schooling attainment has limited the empirical examination of the relationship

between levels of human capital and economic growth for periods before the late twentieth century.

However, Sandberg (1982) has argued, based on a descriptive comparison of economies in various

categories, that those with high levels of schooling in 1850 subsequently experienced faster rates of

economic growth. Some studies, such as O’Rourke and Williamson (1997) and Foreman-Peck and Lains

(1999), have found that high levels of schooling and literacy have contributed to more rapid rates of

convergence for European countries in the late nineteenth century and at the state level for the U.S. over

the twentieth century (Connolly 2004).

Bowman and Anderson (1963), a much earlier study based on international evidence for the mid-

twentieth century, can be interpreted in the spirit of relating levels of education to subsequent levels of

income growth. Their reading of the cross-country relationship between literacy rates and per capita

income at mid-twentieth-century was that a threshold of 40 percent adult literacy was required for a

country to have a per capita income above 300 1955 dollars. Some have ahistorically projected back this

literacy threshold to earlier centuries although the Bowman and Anderson proposal was intended to

apply to mid-twentieth century development patterns.

The mechanisms by which the level of schooling would influence the rate of economic growth are

problematic to establish. One can distinguish two general possibilities. One would be that higher levels of

educational attainment facilitate adaptation and responsiveness to change throughout the workforce.

This would be especially important where a large percentage of workers are in decision making positions

such as an economy composed largely of small farmers and other small enterprises. The finding of

Foster and Rosenzweig (1996) for late twentieth century India that the rate of return to schooling is

higher during periods of more rapid technological advance in agriculture would be consistent with this.

Likewise, Nilsson et al (1999) find that literacy was important for nineteenth-century Swedish farmers in

dealing with enclosure, an institutional change. The other possibility is that higher levels of educational

attainment increase the potential pool from which an elite group responsible for innovation can be

recruited. This could be viewed as applying specifically to scientific and technical innovation as in Mokyr

(2002) and Jones (2002) � but also to technological and industrial leadership more generally (Nelson and

Wright 1992) and to facilitating advancement in society by ability irrespective of social origins (Galor and

Tsiddon 1997). Recently, Labuske and Baten (2004) have found that international rates of patenting are

related to secondary enrollment rates.

Two issues have arisen in the recent theoretical literature regarding specifying relationships between the

level of human capital and rates of economic growth. First, Lucas (1988) in an influential model of the

impact of human capital on growth, specifies that the rate of growth of human capital formation

depends on initial levels of human capital, in other words that parents’ and teachers’ human capital has a

direct positive influence on the rate of growth of learners’ human capital. This specification of the impact

of the initial level of human capital allows for ongoing and unbounded growth of human capital and

through this its ongoing contribution to economic growth. Such ongoing growth of human capital could

occur through improvements in the quality of schooling or through enhanced improvements in learning

from parents and other informal settings. While it might be plausible to suppose that improved

education of teachers will enhance their effectiveness with learners, it seems less plausible to suppose

that this enhanced effectiveness will increase unbounded in proportion to initial levels of education

(Lord 2001, 82).

A second issue is that insofar as higher levels of human capital contribute to economic growth through

increases in research and development activity and innovative activity more generally, one would expect

the presence of scale effects. Economies with larger populations holding constant their level of human

capital per person should benefit from more overall innovative activity simply because they have more

people engaged in innovative activity. Jones (1995) has pointed out that such scale effects seem

implausible if one looks at the time series relationship between rates of economic growth and those

engaged in innovative activity. In recent decades the growth of the number of scientists, engineers, and

others engaged in innovative activity has far outstripped the actual growth of productivity and other

indicators of direct impact on innovation. Thus, one should allow for diminishing returns in the

relationship between levels of education and technological advance.

Thus, as with schooling externalities, considering the impact of levels of education on growth offers

numerous channels of influence leaving the challenge for the historian of ascertaining their quantitative

importance in the past.

Conclusion

This survey has considered some of the basic ways in which the rise of mass education has contributed

to economic growth in recent centuries. Given their potential influence on labor productivity, levels and

changes in schooling and of human capital more generally have the potential for explaining a large share

of increases in per capita output over time. However, increases in mass schooling seem to explain a

major share of economic growth only over relatively short periods of time, with a more modest impact

over longer time horizons. In some situations, such as the United States in the twentieth century, it

appears that improvements in the schooling of the labor force have made substantial contributions to

economic growth. Yet schooling should not be seen as either a necessary or sufficient condition for

generating economic growth. Factors other than education can contribute to economic growth and in

their absence, it is not clear that schooling in itself can contribute to economic growth. Moreover, there

are likely limits on the extent to which average years of schooling of the labor force can expand, although

improvement in the quality of schooling is not so obviously bounded. Perhaps the most obvious avenue

through which education has contributed to economic growth is by expanding the rate of technological

change. But as has been noted, there are numerous other possible channels of influence ranging from

political stability and property rights to life expectancy and fertility. The diversity of these channels point

to both the challenges and the opportunities in examining the historical connections between education

and economic growth.

References

Aaronson, Daniel and Daniel Sullivan. “Growth in Worker Quality.” Economic Perspectives, Federal

Reserve Bank of Chicago 25, no. 4 (2001): 53-74.

Abramovitz, Moses and Paul David. “American Macroeconomic Growth in the Era of Knowledge-Based

Progress: The Long-Run Perspective.” In Cambridge Economic History of the United States, Vol. III, The

Twentieth Century, edited by Stanley L. Engerman and Robert E. Gallman, 1-92. New York: Cambridge

University Press, 2000.

A’Hearn, Brian. “Institutions, Externalities, and Economic Growth in Southern Italy: Evidence from the

Cotton Textile Industry, 1861-1914.” Economic History Review 51, no. 4 (1998): 734-62.

Arnove, Robert F. and Harvey J. Graff, editors. National Literacy Campaigns: Historical and

Comparative Perspectives. New York: Plenum Press, 1987.

Ashton, T.S. The Industrial Revolution, 1760-1830. Oxford: Oxford University Press, 1948.

Barro, Robert J. “Notes on Growth Accounting.” NBER Working Paper 6654, 1998.

Baumol, William. “Entrepreneurship: Productive, Unproductive, and Destructive.” Journal of Political

Economy 98, no. 5, part 1 (1990): 893-921.

Benhabib, J. and M. M. Spiegel. “The Role of Human Capital in Economic Development: Evidence from

Aggregate Cross-country Data.” Journal of Monetary Economics 34 (1994): 143-73.

Bessen, James. “Technology and Learning by Factory Workers: The Stretch-Out at Lowell, 1842.” Journal

of Economic History 63, no. 1 (2003): 33-64.

Bils, Mark and Peter J. Klenow. “Does Schooling Cause Growth?” American Economic Review 90, no. 5

(2000): 1160-83.

Birdsall, Nancy. “Public Spending on Higher Education in Developing Countries: Too Much or Too

Little?” Economics of Education Review 15, no. 4 (1996): 407-19.

Blaug, Mark. An Introduction to the Economics of Education. Harmondsworth, England: Penguin Books,

1970.

Boot, H.M. “How Skilled Were Lancashire Cotton Factory Workers in 1833?” Economic History Review

48, no. 2 (1995): 283-303.

Bowman, Mary Jean and C. Arnold Anderson. “Concerning the Role of Education in Development.” In

Old Societies and New States: The Quest for Modernity in Africa and Asia, edited by Clifford Geertz.

Glencoe, IL: Free Press, 1963.

Broadberry, Stephen. “Human Capital and Productivity Performance: Britain, the United States and

Germany, 1870-1990.” In The Economic Future in Historical Perspective, edited by Paul A. David and

Mark Thomas. Oxford: Oxford University Press, 2003.

Conlisk, John. “Comments” on Griliches. In Education, Income, and Human Capital, edited by W. Lee

Hansen. New York: Columbia University Press, 1970.

Connolly, Michelle. “Human Capital and Growth in the Postbellum South: A Separate but Unequal

Story.” Journal of Economic History 64, no.2 (2004): 363-99.

Crafts, Nicholas. “Exogenous or Endogenous Growth? The Industrial Revolution Reconsidered.” Journal

of Economic History 55, no. 4 (1995): 745-72.

Davies, James and John Whalley. “Taxes and Capital Formation: How Important Is Human Capital?” In

National Saving and Economic Performance, edited by B. Douglas Bernheim and John B. Shoven, 163-97.

Chicago: University of Chicago Press, 1991.

DeLong, J. Bradford, Claudia Goldin and Lawrence F. Katz. “Sustaining U.S. Economic Growth.” In

Agenda for the Nation, edited by Henry Aaron, James M. Lindsay, and Pietro S. Niyola, 17-60.

Washington, D.C.: Brookings Institution Press, 2003.

Denison, Edward F. The Sources of Economic Growth in the United Statesand the Alternatives before Us.

New York: Committee for Economic Development, 1962.

Denison, Edward F. Why Growth Rates Differ: Postwar Experience in Nine Western Countries.

Washington, D.C.: Brookings Institution Press, 1967.

Easterlin, Richard. “Why Isn’t the Whole World Developed?” Journal of Economic History 41, no. 1 (1981):

1-19.

Foreman-Peck, James and Pedro Lains. “Economic Growth in the European Periphery, 1870-1914.”

Paper presented at the Third Conference of the European Historical Economics Society, Lisbon,

Portugal, 1999..

Foster, Andrew D. and Mark R. Rosenzweig. “Technical Change and Human-capital Returns and

Investments: Evidence from the Green Revolution.” American Economic Review 86, no. 4 (1996): 931-53.

Galor, Oded and Daniel Tsiddon. “The Distribution of Human Capital, Technological Progress and

Economic Growth.” Journal of Economic Growth 2, no. 1 (1997): 93-124.

Galor, Oded and Omer Moav. “Das Human Kapital.” Brown University Working Paper No. 2000-17, July

2003.

Goldin, Claudia. “The Human Capital Century and American Leadership: Virtues of the Past.” Journal of

Economic History 61, no. 2 (2001): 263-92.

Goldin, Claudia and Lawrence F. Katz. “The Origins of Technology-Skill Complementarity.” Quarterly

Journal of Economics 113, no. 3 (1998): 693-732.

Goldin, Claudia and Lawrence F. Katz. “Decreasing (and Then Increasing) Inequality in America: A Tale

of Two Half-Centuries.” In The Causes and Consequences of Increasing Inequality, edited by Finis Welch,

37-82. Chicago: University of Chicago Press, 2001.

Graff, Harvey.. The Legacies of Literacy: Continuities and Contradictions in Western Culture and Society.

Bloomington: Indiana University Press, 1987.

Griliches, Zvi. “Notes on the Role of Education in Production Functions and Growth Accounting.” In

Education, Income, and Human Capital, edited by W. Lee Hansen. New York: Columbia University

Press, 1970.

Hansen, Hal. “Caps and Gowns: Historical Reflections on the Institutions that Shaped Learning for and

at Work in Germany and the United States, 1800-1945.” Ph.D. dissertation, University of Wisconsin, 1997.

Hanushek, Eric and Dennis D. Kimko. “Schooling, Labor-Force Quality, and the Growth of Nations.”

American Economic Review 90, no.3 (2000): 1184-1208.

Hendricks, Lutz. “How Important Is Human Capital for Development? Evidence from Immigrant

Earnings.” American Economic Review 92, no. 1 (2002): 198-219.

Ho, Mun S. and Dale Jorgenson. “The Quality of the U.S. Work Force, 1948-1995.” Harvard University

Working Paper, 1999.

Houston, R.A. Literacy in Early Modern Europe: Culture and Education, 1500-1800.

London: Longman, 1988.

Jones, Charles. “R&D-Based Models of Economic Growth.” Journal of Political Economy 103, no. 4

(1995): 759-84.

Jones, Charles. “Sources of U.S. Economic Growth in a World of Ideas.” American Economic Review 92,

no. 1 (2002): 220-39.

Jorgenson, Dale W. and Barbara M. Fraumeni. “The Accumulation of Human and Nonhuman Capital,

1948-84.” In The Measurement of Saving, Investment, and Wealth, edited by R. E. Lipsey and H. S. Tice.

Chicago: University of Chicago Press, 1989.

Jorgenson, Dale W. and Zvi Griliches. “The Explanation of Productivity Change.” Review of Economic

Studies 34, no. 3 (1967): 249-83.

Kendrick, John W. “How Much Does Capital Explain?” In Explaining Economic Growth: Essays in

Honour of Angus Maddison, edited by Adam Szirmai, Bart van Ark and Dirk Pilat, 129-45. Amsterdam:

North Holland, 1993.

Krueger, Alan B. and Mikael Lindahl. 2001. “Education for Growth: Why and for Whom?”

Journal of Economic Literature 39, no. 4 (2001): 1101-36.

Krueger, Anne O. “Factor Endowments and per Capita Income Differences among Countries.” Economic

Journal 78, no. 311 (1968): 641-59.

Kuznets, Simon. Modern Economic Growth: Rate, Structure and Spread. New Haven: Yale University

Press, 1966.

Labuske, Kirsten and Joerg Baten. “Patenting Abroad and Human Capital Formation.” University of

Tubingen Working Paper, 2004.

Laqueur, Thomas. “Debate: Literacy and Social Mobility in the Industrial Revolution in England.” Past

and Present 64, no. 1 (1974): 96-107.

Lichtenberg, Frank R. “Have International Differences in Educational Attainments Narrowed?” In

Convergence of Productivity: Cross-national Studies and Historical Evidence, edited by William J.

Baumol, Richard R. Nelson, and Edward N. Wolff, 225-42. New York: Oxford University Press, 1994.

Lindert, Peter H. Growing Public: Social Spending and Economic Growth since the Eighteenth Century.

Cambridge: Cambridge University Press, 2004.

Lord, William A. Household Dynamics: Economic Growth and Policy. New York: Oxford University Press,

2002.

Lucas, Robert E., Jr. “On the Mechanics of Economic Development.” Journal of Monetary Economics 22,

no. 1 (1988): 3-42.

Maddison, Angus. Monitoring the World Economy, 1820-1992. Paris: OECD, 1995.

Maddison, Angus. The World Economy: A Millennial Perspective. Paris: OECD, 2001.

Margo, Robert A. Race and Schooling in the South, 1880-1950: An Economic History. Chicago: University

of Chicago Press, 1990.

Mariscal, Elisa and Kenneth Sokoloff. “Schooling, Suffrage, and the Persistence of Inequality in the

Americas, 1800-1945.” InPolitical Institutions and Economic Growth in Latin America: Essays in Policy,

History, and Political Economy, edited by Stephen Haber, 159-218. Stanford: Hoover Institution Press,

2000.

Matthews, R.C.O., C. H. Feinstein, and J.C. Odling-Smee. British Economic Growth, 1856-1973. Stanford:

Stanford University Press, 1982.

McMahon, Walter. Education and Development: Measuring the Social Benefits. Oxford: Oxford

University Press, 2002.

Mitch, David. “The Spread of Literacy in Nineteenth-Century England.” Ph.D. dissertation, University of

Chicago, 1982.

Mitch, David. “Education and Economic Growth: Another Axiom of Indispensability?” In Education and

Economic Development since the Industrial Revolution, edited by Gabriel Tortella. Valencia: Generalitat

Valencia, 1990. Reprinted in The Economic Value of Education: Studies in the Economics of Education,

edited by Mark Blaug, 385-401. Cheltenham, UK: Edward Elgar, 1992.

Mitch, David. “The Role of Education and Skill in the British Industrial Revolution.” In The British

Industrial Revolution: An Economic Perspective (second edition), edited by Joel Mokyr, 241-79. Boulder,

CO: Westview Press, 1999.

Mitch, David. “Education and Skill of the British Labour Force.” In The Cambridge Economic History of

Modern Britain, Vol.1, Industrialization, 1700-1860, edited by Roderick Floud and Paul Johnson, 332-

56.Cambridge: Cambridge University Press, 2004a.

Mitch, David. “School Finance.” In International Handbook on the Economics of Education, edited by

Geraint Johnes and Jill Johnes, 260-97 Cheltenham UK: Edward Elgar, 2004b.

Mokyr, Joel. The Gifts of Athena: Historical Origins of the Knowledge Economy. Princeton: Princeton

University Press, 2002.

Mulligan, Casey G. and Xavier Sala-I-Martin. “A Labor Income-based Measure of the Value of Human

Capital: An Application to the States of the United States.” Japanand the World Economy 9, no. 2 (1997):

159-91.

Mulligan, Casey B. and Xavier Sala-I-Martin. “Measuring Aggregate Human Capital.” Journal of Economic

Growth 5, no. 3 (2002): 215-52.

Murphy, Kevin M., Andrei Shleifer, and Robert W. Vishny. “The Allocation of Talent: Implications for

Growth.” Quarterly Journal of Economics 106, no. 2 (1991): 503-30.

National Center of Education Statistics. 120 Years of American Education: A Statistical Portrait.

Washington, D.C.: U.S. Department of Education, Office of Educational Research and Improvement,

1993.

Nelson, Richard R. and Gavin Wright. “The Rise and Fall of American Technological Leadership: The

Postwar Era in Historical Perspective.” Journal of Economic Literature 30, no. 4 (1992): 1931-64.

Nicholas, Stephen and Jacqueline Nicholas. “Male Literacy, â�˜Deskilling’ and the Industrial Revolution.”

Journal of Interdisciplinary History 23, no. 1 (1992): 1-18.

Nilsson, Anders, Lars Pettersson and Patrick Svensson. “Agrarian Transition and Literacy: The Case of

Nineteenth-century Sweden.” European Review of Economic History 3, no. 1 (1999): 79-96.

North, Douglass C. Institutions, Institutional Change and Economic Performance. Cambridge:

Cambridge University Press, 1990.

OECD. Education at a Glance: OECD Indicators. Paris: OECD, 2001.

Olson, Mancur, Jr. “Big Bills Left on the Sidewalk: Why Some Nations Are Rich and Others Poor.” Journal

of Economic Perspectives 10, no. 2 (1996): 3-24.

O’Rourke, Kevin and Jeffrey G. Williamson. “Around the European Periphery, 1870-1913: Globalization,

Schooling and Growth.” European Review of Economic History 1, no. 2 (1997): 153-90.

Pritchett, Lant. “Where Has All the Education Gone?” World Bank Economic Review 15, no. 3 (2001): 367-

91.

Psacharopoulos, George. “The Contribution of Education to Economic Growth: International

Comparisons.” In International Comparisons of Productivity and Causes of the Slowdown, edited by

John W. Kendrick. Cambridge, MA: Ballinger Publishing, 1984.

Psacharopoulos, George. “Public Spending on Higher Education in Developing Countries: Too Much

Rather than Too Little.” Economics of Education Review 15, no. 4 (1996): 421-22.

Psacharopoulos, George and Harry Anthony Patrinos. “Human Capital and Rates of Return.” In

International Handbook on the Economics of Education, edited by Geraint Johnes and Jill Johnes, 1-57.

Cheltenham, UK: Edward Elgar, 2004.

Rangazas, Peter. “Schooling and Economic Growth: A King-Rebelo Experiment with Human Capital.”

Journal of Monetary Economics 46, no. 2 (2000): 397-416.

Rosenzweig, Mark. “Why Are There Returns to Schooling?” American Economic Review Papers and

Proceedings 85, no. 2 (1995): 69-75.

Rosenzweig, Mark. “Schooling, Economic Growth and Aggregate Data.” In Development, Duality and the

International Economic Regime, edited by Gary Saxonhouse and T.N. Srinivasan, 107-29. Ann Arbor:

University of Michigan Press, 1997.

Sandberg, Lars. “The Case of the Impoverished Sophisticate: Human Capital and Swedish Economic

Growth before World War I.” Journal of Economic History 39, no.1 (1979): 225-41.

Sandberg, Lars. “Ignorance, Poverty and Economic Backwardness in the Early Stages of European

Industrialization: Variations on Alexander Gerschenkron’s Grand Theme.” Journal of European

Economic History 11 (1982): 675-98.

Sanderson, Michael. “Literacy and Social Mobility in the Industrial Revolution in England.” Past and

Present 56 (1972): 75-104.

Saxonhouse, Gary. “Productivity Change and Labor Absorption in Japanese Cotton Spinning, 1891-1935�

Quarterly Journal of Economics 91, no. 2 (1977): 195-220.

Smith, Adam. An Inquiry into the Nature and Causes of the Wealth of Nations. Chicago: University of

Chicago Press, [1776] 1976.

Temple, Jonathan. “Growth Effects of Education and Social Capital in the OECD Countries.” OECD

Economic Studies 33, no. 1 (2001a): 58-96.

Temple, Jonathan. “Generalizations That Aren’t? Evidence on Education and Growth.” European

Economic Review 45, no. 4-6 (2001b): 905-18.

Topel, Robert. “Labor Markets and Economic Growth.” In Handbook of Labor Economics, Volume 3,

edited by Orley Ashenfelter and David Card, 2943-84. Amsterdam: Elsevier Science, 1999.

Woessmann, Ludger. Schooling and the Quality of Human Capital. Berlin: Springer, 2002.

Woessmann, Ludger. “Specifying Human Capital.” Journal of Economic Surveys 17, no.3 (2003): 239-70.

Wood, Adrian. “How Trade Hurt Unskilled Workers.” Journal of Economic Perspectives 9, no. 3 (1995):

57-80.

Young, Alwyn. “The Tyranny of Numbers: Confronting the Statistical Realities of the East Asian Growth

Experience.” Quarterly Journal of Economics 110, no. 3 (1995): 641-80.

[1] I have received helpful comments on this essay from Mac Boot, Claudia Goldin, Bill Lord, Lant

Pritchett, Robert Whaples, and an anonymous referee. At an earlier stage in working through some of

this material, I benefited from a quite useful conversation with Nick Crafts. However, I bear sole

responsibility for remaining errors and shortcomings.

[2] For a detailed survey of trends in schooling in the early modern and modern period see Graff (1987).

[3] See Barro (1998) for a brief intellectual history of growth accounting.

[4] Blaug (1970) provides an accessible, detailed critique of the assumptions behind Denison’s growth

accounting approach and Topel (1999) provides a further discussion of the problems of using a growth

accounting approach to measure the contribution of education, especially those due to omitting social

externalities.

[5] By using a Cobb-Douglas specification of the aggregate production function, one can arrive at the

following equation for the ratio between final and initial national income per worker due to increases in

average school years completed between the two time periods, t = 0 and t =1:

Start with the aggregate production function specification:

Y = A K(1-�) [(1+r)S L]�

Y/L = A (K/L)(1-�) [(1+r)S L/L]�

Y/L = A (K/L)(1-�) [(1+r)S]�

Assume that the average years of schooling of the labor force is the only change between t = 0 and t =1;

that is, assume no change in the ratio of capital to labor between time periods. Then the ratio of the

income per worker in the later time period to the earlier time period will be:

(Y/L)1/ (Y/L)0 = ( (1 + r )S1- S0 )�

Where Y = output, A = a measure of the current state of technology, K = the physical capital stock, L =

the labor force, r = the percent by which a year of schooling increases labor productivity, S is the average

years of schooling completed by the labor force in each time period, � is labor’s share in national income,

and the subscripts 0 and 1 denote initial and final time periods.

As noted above, the derivation above is for a partial equilibrium change in years of schooling of the labor

force holding constant the physical capital stock. Allowing for physical capital stock accumulation in

response to schooling increases in a Solow-type model implies that the ratio of final to initial output per

worker will be

(Y/L)1/ (Y/L)0 = ( (1 + r )S1 - S0 ) .

For a derivation of this see Lord (2001, 99-100). Lord’s derivation differs from that here by specifying the

technology parameter A as labor augmenting. Allowing for increases in A over time due to technical

change would further increase the contribution to output per worker of additional years of schooling.

[6]To take a specific example, suppose that in the steady-state case of Table 1B, a 5 percent earnings

premium per year of schooling is assigned to the first 6 years of schooling, i.e. primary schooling, a 10

percent earnings premium per year is assigned to the next 6 years of schooling, i.e. secondary schooling,

and a 15 percent earnings premium per year is assigned to the final 4 years of schooling, that is college.

In that case, the impact on steady state income per capita compared with no schooling at all would be

(1.05)6x(1.10)6x(1.15)4 = 4.15, compared with the 4.59 in going from no schooling to universal college at a

10 percent rate of return for every year of school completed.

[7] Denison’s standard growth accounting approach assumes that education is labor augmenting and, in

particular, that there is an infinite elasticity of substitution between skilled and unskilled labor. This

specification is conventional in growth accounting analysis. But another common specification in

entering education into aggregate production functions is to specify human capital as a third factor of

production along with unskilled labor and physical capital. Insofar as this is done with a Cobb-Douglas

production function specification, as is conventional, the implied elasticity of substitution between

human capital and either unskilled labor or physical capital is unity. The complementarity between

human capital and other inputs this implies will tend to increase the contribution of human capital

increases to economic growth by decreasing the tendency for diminishing returns to set in. (For a fuller

treatment of the considerations involved see Griliches 1970, Conlisk 1970, Broadberry 2003). For an

application of this approach in a historical growth accounting exercise, see Crafts (1995), who finds a

fairly substantial contribution of human capital during the English industrial revolution. For a critique of

Crafts’ estimates see Mitch (1999).

[8] For an examination of long-run growth dynamics with schooling investments endogenously

determined by transfer-constrained family decisions see Lord 2001, 209-213 and Rangazas 2000. Lord

and Rangazas find that allowing for the fact that families are credit constrained in making schooling

investment decisions is consistent with the time path of interest rates in the U.S. between 1870 and 1970.

Citation: Mitch, David. “Education and Economic Growth in Historical Perspective”. EH.Net

Encyclopedia, edited by Robert Whaples. July 26, 2005. URL http://eh.net/encyclopedia/education-and-

economic-growth-in-historical-perspective/

Distant Tyranny: Markets, Power, and Backwardnessin Spain, 1650-1800

Author(s): Grafe, Regina

Reviewer(s): Drelichman, Mauricio

Published by EH.Net (September 2012)

Regina Grafe, Distant Tyranny: Markets, Power, and Backwardness in Spain, 1650-1800. Princeton, NJ:

Princeton University Press, 2012. xvii + 291 pp. $39.50 (hardcover), ISBN 978-0-691-14484-9.

Reviewed for EH.Net by Mauricio Drelichman, Department of Economics, University of British

Columbia.

Spain has long been a thorn in the side of economic historians. In the sixteenth century, it was richer and

politically more advanced than virtually all its European peers. At the beginning of the seventeenth it

ruled the largest empire that had yet existed, while giving the world masterpieces of art and literature.

Ever since, searching for the roots of the long ?decline? that ensued has been the single-minded quest of

political commentators and historians of Spain alike. With Distant Tyranny, Regina Grafe may well have

put this entire group out of a job.

A large, if relatively recent, literature has established that Spain did not quite stagnate after 1600, and

certainly did not decline. It nonetheless grew at a substantially slower pace than the European norm, and

hence fell steadily through the ranks of Western economic powers. Economists in the New Institutional

Economics tradition pinned the blame for this on a predatory, absolutist state and its extractive

institutions. Historians, on their part, have often pointed at the ?tyranny of distance? ? Spain?s famously

tortuous geography and difficult communications ? as the main culprit for its economic

underperformance.

To take on both the NIE and the geographic traditions, Grafe enlists the help of an unlikely ally: salt cod,

or bacalao, as it is still known in Spain. By the seventeenth century cod was a staple food in Spain, and

the trade imbalance it represented was a continuous source of worry to mercantilist minds. Traditional

studies of market integration have relied almost exclusively on grain prices. Grain markets, however,

were characterized by heavy intervention from local governments to guarantee bread supplies. Cod was

free from any such distortions, while ubiquitous enough to serve as a benchmark good. Chapter 3

explores the production technology, trade mechanisms, internal distribution, and the cultural and

biological bases of cod demand. The result is a strong case that cod can indeed be used to trace and

characterize the behavior of markets across Spain.

Data in hand, Grafe proceeds to evaluate the tyranny of distance argument. That Spanish markets were

not integrated across different regions is a well-known result. What is new ? and striking ? is that the lack

of integration is almost completely uncorrelated with distance and transport costs. These were indeed

formidable obstacles, but progress was being steadily made in improving road links and reducing travel

times. More importantly, when the price of North American cod in the Atlantic port of Seville was 40%

higher than in far inland Madrid, long distances and poor transport seem the wrong places to look for an

explanation.

Chapters 5 and 6 deliver the central thesis of the book. The roots of Spain?s lack of integration ?and the

backwardness that ultimately resulted from it? are traced to the extreme jurisdictional fragmentation

that afflicted the peninsula. The first indictment is handed to Spain?s ?historic territories? ? roughly

corresponding to the medieval predecessor states ? which persisted in the form of separate kingdoms

until the eighteenth century, and much longer as differentiated fiscal and political institutions. Next, the ?

urban republics? ? the cities as seats of economic and political power ? take their share of the blame.

Both territories and cities had inherited old ?freedoms?. These consisted in exemptions from royal

taxation and the ability to maintain differentiated fiscal regimes, resulting in large distortions and

formidable barriers to trade. Cities and territories were able to push back on each and every attempt of

the monarchy to streamline and rationalize the system. Their success evidenced how little power the

supposedly ?absolutist? Habsburg and Bourbon dynasties really had. While kings were expected to serve

as arbiters and mediators, urban and regional elites severely curtailed the power of any monarch that

tried to engage in meaningful state-building. In one telling example, the crown strove to harmonize the

tobacco monopoly ? one of its most profitable revenue streams ? across the country. While dutifully

implemented in Castile, the historic heartland of Spain, the tax was strongly resisted in some territories

and lackadaisically enforced in others. The kingdom of Navarre dismissed it outright, arguing that its own

monopoly predated the Crown?s. In order to maintain consistency across tax rates and internal borders,

and unable to force a unified fiscal implementation, the king of Spain was forced to become the tax

farmer of the Navarrese tobacco monopoly ? a monarch reduced to serving as a contractor of one of its

own domains.

There is little to quibble with in Grafe?s work. The early chapters build a solid foundation, based on

detailed archival research and a meticulous tracing of market behavior. As the focus shifts to broader

issues of political economy, the weight of the argument comes to rest on a tightly woven historical

narrative and a brilliant command of a literature as unwieldy as any. When applied to an issue as weighty

as the long-run underperformance of Spain, one cannot help but admire the combination of a detailed,

erudite analysis with a coherent macro-historical logic. If one area for improvement were to be found, it

would be on the comparative aspect. While the centralist French experience is consistently brought up as

the mirror image of Spain, perhaps Germany, with its large jurisdictional fragmentation but very

different political and economic trajectories, might have provided a more interesting counterpoint.

When combined with the weakness of the central state, the hodgepodge of privileges, exemptions, and

other ?freedoms? of Spanish territories and cities resulted in a system that preserved the special interests

of local elites at the expense of consumers ? and, ultimately, of long-run growth. Whenever kings tried to

strengthen their position, revolts and secession ensued. Monarchs used repression sparingly, and always

accompanied it with a relaxation of the offending policies. The paradigm of a weak center and strong

regions survived throughout the old regime, becoming a headache for the Napoleonic invaders, and only

retreating in the twentieth century under the extraordinary violence brought about by the Civil War.

However, as these lines are written, nearly two million people fill the streets of Barcelona clamoring for

Catalan independence. In a rare feat for an economic history book, Distant Tyranny may yet shed as

much light on current events as it does on the past.

Mauricio Drelichman is Associate Professor of Economics at the University of British Columbia, and

Scholar in the Institutions, Organizations, and Growth program of the Canadian Institute for Advanced

Research (CIFAR). He is the author of numerous articles on the institutional and financial history of early

modern Spain.

???

Copyright (c) 2012 by EH.Net. All rights reserved. This work may be copied for non-profit educational

uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net

Administrator (administrator@eh.net). Published by EH.Net (September 2012). All EH.Net reviews are

archived at http://www.eh.net/BookReview.

Subject(s): Economywide Country Studies and Comparative History

Government, Law and Regulation, Public Finance

Historical Geography

International and Domestic Trade and Relations

Markets and Institutions

Geographic Area(s): Europe

Time Period(s): 17th Century

18th Century

Why Europe Grew Rich and Asia Did Not: GlobalEconomic Divergence, 1600-1850

Author(s): Parthasarathi, Prasannan

Reviewer(s): Mokyr, Joel

Published by EH.Net (January 2012)

Prasannan Parthasarathi, Why Europe Grew Rich and Asia Did Not: Global Economic Divergence, 1600-

1850. Cambridge: Cambridge University Press, 2011. 365 pp. $30 (paperback), ISBN: 978-0-521-16824-3.

Reviewed for EH.Net by Joel Mokyr, Departments of Economics and History, Northwestern University.

The year 2011 was? a banner year for ambitious books that explain what is becoming known as the ?

Great Divergence? of the West and the Rest. In addition to the book under review here, two other books

by major scholars have appeared: Jean-Laurent Rosenthal and Bin Wong?s Before and Beyond

Divergence and Ian Morris?s Why the West Rules for Now. One would have hoped that the proliferation of

this literature would perhaps start to converge toward a consensus, but alas, so far discord and

confusion reign in this debate. One could call it perhaps ?the small divergence.?

Parthasarathi?s book, its title notwithstanding, is not about ?Asia? and ?Europe? but really about India

and Britain. While there are some pages that deal with China and the European Continent, the author

clearly is most at ease when writing about the former two countries. Japan makes only an occasional

appearance, and the rest of Asia does not figure much. Above all, this book is an argument that the ?

California hypothesis? applies to India as well. The California School, most notably embodied in Kenneth

Pomeranz?s Great Divergence and Andre Gunder Frank?s Re-Orient, argue that the Chinese economy

rather than falling behind from Ming times actually performed admirably until the end of the eighteenth

century, and that it was only the Industrial Revolution in Western Europe that (temporarily) gave Europe

a big advantage. Parthasarathi?s book makes a similar argument for India. Moghul India, he argues, was

not backward, primitive, ignorant, poorly organized, or anything of the kind. As late as 1800 it was

technologically sophisticated, scientifically progressive, commercialized with well-working institutions

and efficient markets that allowed the Indian economy to work well. Its cottons were in high demand

world-wide, and its abilities in a host of other industries were more than respectable.

If everything in India was so good, why was everything so bad? Parthasarathi?s argument depends

heavily on his interpretation of the British Industrial Revolution. For him the Industrial Revolution was

above all policy-driven. In his interpretation, the Industrial Revolution was the result of deliberate

industrial policies by its governments, protecting domestic industry and encouraging import-

substitution. What was true for Britain, Parthasarathi continues, was even more true for the Continental

countries. Industrial policies shaped the speed and form of economic development. The one country

that had as much potential as Belgium or Germany was India. But the British Raj mercilessly pressed

their advantage against the hapless Indians, denied them access to the British market, and forced them

to buy the cheap cotton products with which Lancashire after 1820 increasingly flooded the Indian

market. India was ruled by the British, and they not only did nothing to encourage the development of

manufacturing there; they did all they could to obstruct it. The power of states could determine

successful economic development and prevent it elsewhere.

The argument is, of course, not new, and much of the evidence that Parthasarathi relies on has been

used by other scholars. A notable example of an important essay published more than three decades ago

(not cited by Parthasarathi) is Subramanian Swamy?s ?The Response to Economic Challenge: A

Comparative Economic History of China and India, 1870-1952? (Quarterly Journal of Economics, 1979).

Swamy fully anticipates Parthasarathi?s argument: ?The slow industrialization, or at least the lack of rapid

industrial growth in India … can, be ascribed to the unwillingness of foreign capital to enter into the

basic industries, and to the British Indian Government for placing obstacles in the path of indigenous

investment … It was the combination of ?British interests? and the underlying social ethos of the

Government of India that they were there ?to govern, to stabilize, and to administer,? but not to

transform that proved to be the main cause of India?s slow development? (pp. 37?38).

Yet it is far from clear whether we have fully disposed of ?deep? cultural differences between Asia and

Europe. Eight years after Swamy?s paper, Gregory Clark published a famous paper with a disturbing

finding, comparing the Indian cotton mills in Bombay to those in Lancashire. He found that although

Indian wages were only a sixth of British wages and they were using essentially the same equipment, the

Indians had no major cost advantage over their British competitors, because Indian labor?s efficiency

was only a fraction of their counterparts in Manchester. Clark left the reasons for this open, but

subsequently in A Farewell to Alms he returns to the issue and argues that labor quality was remarkably

low in poor countries, because of high absenteeism, poor discipline and similar matters. Whether Clark is

right or not, Parthasarathi pays no heed to his work. Perhaps he can show us that low labor productivity

can somehow be chalked up to the Raj as well, but until he does, his case is simply unpersuasive.

By blaming the Raj squarely for everything that went wrong with India?s nineteenth century

development, Parthasarathi offers us a warmed-up old nationalist chestnut, and his waving at the post-

colonial literature does not add much credibility to his case. While he is surely right that one can easily

overstate the weaknesses of the Indian economy on the eve of the Industrial Revolution, his cherry-

picking of examples (there are only a few tables in the book and only one of them pertains to India)

simply does not persuade. Had Britain and India been at the same level of economic and institutional

development in 1750, why was there no ?Western Europe Company? set up in Delhi that would have

exploited the political divisions within Europe, established an Indian ?Raj? based in London and forced

Europe to accept Indian calicoes without tariffs? Moreover, there were Asian nations, from Persia to

Siam, which were never controlled by European Imperialists, yet they never seem to have developed

much modern industry either. Neither, for that matter, did Imperial China, which poses a logical

problem for anyone trying to blame imperialism for economic backwardness in Asia. The case of China

is brushed off by Parthasarathi as the result of an ecological disaster due to deforestation and the

feckless policies of the Q?ing government which did nothing to encourage the exploitation of Chinese

coal deposits. But why would we believe that a counterfactual Indian independent government would

have performed like Belgians or Prussians and not more like the Q?ing? To make his case stick,

Parthasarathi ought perhaps have argued that India?s society was much like Japan?s, and that in the

absence of colonial domination it would have made its own rules work for it. But such arguments are

never made, and I suspect for good reason.

Parthasarathi is a learned and well-read historian, and he is no-doubt correct in pointing out that

scholars have underrated the vitality and strength of the Indian economy in the eighteenth century.

There were enclaves of highly skilled craftsmen and craftswomen in India, and it is easy to overrate the

advantage that Britain and Europe enjoyed over Asian countries such as India and China. But in his

justifiable indignation over the disrespect shown by ?Eurocentric? scholars to Indian civilization, he lets

his rhetoric get the better of him and so hopelessly overstates his case as to undermine the credibility of

those corrective elements he provides to the standard story that are most valuable.

First, he exaggerates the role of the British government in the first Industrial Revolution. There was no

real industrial policy except for letting the new industrialists do their thing. With a few exceptions such as

the Longitude Board, the demand for military hardware and royal dockyards, and running a patent

office, the government played a remarkably modest role in fostering the Industrial Revolution. On the

Continent this role was clearly larger, but even in Belgium and Prussia, the fact that the government

supported and abetted the process does not prove that the government was a ?critical factor? as

Parthasarathi repeatedly asserts. What these governments did (far more than Westminster) was to invest

in infrastructure or encourage and subsidize others to do so. But this is precisely what the British did in

India: they invested in its infrastructure. Lord Dalhousie, governor general of India 1848?56 (never

mentioned by Parthasarathi) famously said that he introduced three ?great engines of social

improvements?: railways, electric telegraph, and uniform postage (Suresh Chandra Gosh, ?The

Utilitarianism of Dalhousie and the Material Improvement of India? in Modern Asian Studies, 1978, p. 97).

One might add the Ganges irrigation canal, the brainchild of a single-minded Briton, Colonel Proby

Cautley, was a huge success.

The exact dimensions of the impact of the Raj on the Indian economy will remain in dispute. Did the

British extinguish an intellectual community comparable in quality and achievements to the one in

eighteenth century Europe? We are told (p. 266) that the British colonial order led to a lossof patronage

for institutions that produced and diffused knowledge, and that this, presumably, contributed to the

decline of science and technology in the entire subcontinent. It is true that some of the libraries collected

by Maharajas were dispersed and looted, but it seems implausible that a handful of British officials and

soldiers could have wiped out the human capital of a population of close to 200 million people and

reduced them from a vibrant intellectual community to a largely illiterate mass. The Indian society that

emerged in the nineteenth century, Parthasarathi maintains, was radically different from what was there

before. There is no question that there is truth to this argument, and that for much of the nineteenth

century the British discouraged the formation of human capital and local centers of technology.

But it is frustrating that so little is known about Indian progress in the pre-Raj era and that the experts

differ so much. Indian science and technology was surely not as primitive as contemporary Western

observers described, but was it really at a par with Europe as we are told in this book? The complexity of

the matter is wholly reflected in the writings of the Indian scholar Dharampal (not cited by Parthasarathi)

who conceded that ?It is possible that the various sciences and technologies were on a decline in India

around 1750 and, perhaps, had been on a similar course for several centuries previously? but that it was

hard to know because of the ?general incommunicativeness of eighteenth century Indian scholars and

specialists in the various fields? which may have been due to ?the usual secretiveness of such persons?

(http://www.scribd.com/doc/29011033/Dharampal-s-Collected-Writings-Vol-1-5, p. 5, accessed on

Dec. 31, 2011). The difference between that kind of insider science and the growth of public science in

eighteenth-century Western Europe, which was at the very core of the Industrial Enlightenment, is

symptomatic of the weakness of the argument made in this book. At the very least, Parthasarathi seems

to fall into the trap of what Deepak Kumar has called ?a naive (perhaps revivalist) appreciation of pre-

colonial science and technology.?

Part of the book?s weakness is the author?s very limited and minimalist concept of the Industrial

Revolution, which he sees as purely a revolution in cotton and coal. He closely examines one key

industry, cotton, and points out that British consumers were exposed to the high-quality, brilliantly

colored calicoes coming from India. The Act of 1721 prohibited the importation and wearing of these

textiles and thus stimulated British manufacturers to make their own, thus creating powerful incentives

for the invention of machinery in the cotton industry. In this way, the British Industrial Revolution was

indebted to India. Perhaps, but the Calico Act had quite a few exemptions, and its enforcement was far

from water tight. But more to the point, the Industrial Revolution consisted of improvement on a much

broader front than India?s example can account for. Thus in the woolen textiles ? never mentioned by

Parthasarathi ? the introduction of shearing frames in the finishing stages was completely novel. In many

other industries there were critical innovations, some of them the result of unscientific serendipity, but

at least in some cases they were related to scientific advances. In cotton, the most famous example is of

course chlorine bleaching, but Parthasarathi may also find a new book on the British gaslighting industry

instructive (Leslie Tomory, Progressive Enlightenment: The Origins of the Gaslight Industry, 1780-1820,

MIT Press, 2012). Such examples can be multiplied at will.

In Parthasarathi?s opinion, British coal developed in large part because of the wise policies of the

Hanoverian government which regulated prices and protected coastal shipping. They also taxed coal

quite heavily, which may not have been such an advantage. But more to the point, British coalmining,

from the surveying and viewing stage all the way to the market, was in private hands. So were education,

turnpikes, canals, healthcare, railroads, and most law enforcement. There was a fair amount of state

regulation, but it is not clear how much of it was actually enforced and what effect it had. The same is

true a fortiori for protectionism. The argument that Britain succeeded because of and not despite of the

mercantilist policies of the eighteenth century is repeated over and over but never supported with much

evidence. The one area in which British government may get some credit (but oddly never mentioned by

Parthasarathi) is the Old Poor Law, a unique English institution which may have helped bring about

social stability and raised the material quality of life for the bottom third of the income distribution.

This is a polemical book. Parthasarathi criticizes much of the literature on the British Industrial

Revolution and its effect on the rest of the world, and often his critiques are well-aimed and deserved.

There is no question that the initial differences between Asia and Europe on the eve of the Industrial

Revolution have been overdrawn, and that Europe?s success was not quite as predetermined and

inexorable as it was made out to be by scholars from Max Weber to David Landes. Yet there is an equal

risk to exaggerate in the other direction and to argue that there was no difference whatsoever. More

often, Parthasarathi succumbs to the unfortunate habit to take nuanced and subtle arguments of his

opponents, oversimplify them into a cartoon, and then energetically proceed to take these strawmen

apart; this is a time-honored custom in all rhetoric, but if applied too thickly it can be counterproductive.

All in all, this is a provocative and eloquent book that will modify our views of the Great Divergence, if

not nearly as much as its author would hope for.

Joel Mokyr is the author of The Enlightened Economy: An Economic History of Britain, 1700-1850, Yale

University Press, (2009).

Copyright (c) 2012 by EH.Net. All rights reserved. This work may be copied for non-profit educational

uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net

Administrator (administrator@eh.net). Published by EH.Net (January 2012). All EH.Net reviews are

archived at http://www.eh.net/BookReview.

Subject(s): Economic Development, Growth, and Aggregate Productivity

Economic Planning and Policy

Economywide Country Studies and Comparative History

Industry: Manufacturing and Construction

Markets and Institutions

Geographic Area(s): Asia

Europe

Time Period(s): 17th Century

18th Century

19th Century

Slavery and American Economic Development

Author(s): Wright, Gavin

Reviewer(s): Atack, Jeremy

Published by EH.NET (May 2007)

Gavin Wright, Slavery and American Economic Development. Baton Rouge, LA: Louisiana State

University Press, 2006. x + 162 pp. $25 (cloth), ISBN: 0-8071-3183-0.

Reviewed for EH.NET by Jeremy Atack, Department of Economics, Vanderbilt University.

My mother always told me that “good things come in small packages.” This slender volume, which began

its life as the Fleming public lecture series delivered at Louisiana State University in 1997, is a case in

point. Wright returns to the subject ? American slavery ? that marked his professional debut and which

has punctuated much of his distinguished career. Despite, or perhaps because of, his long association

with the topic, this work is far more than a simple synopsis of past research. While the book is not path-

breaking and innovative in the ways that The Political Economy of the Cotton South (Wright 1978) or Old

South, New South (Wright 1986) were, it reflects new insights and research (such as the work by Olmstead

and Rhode (2005) on cotton picking rates) and restates past arguments more forcefully, more eloquently,

and more persuasively as well. Nowhere is this clearer than in the lengthy third chapter which expands

and elaborates upon Wright’s 1979 invited American Economic Review critique of Fogel and Engerman’s

work on the relative efficiency of slavery (Wright 1979).

The book’s pervasive theme is that of slavery as a set of property rights which vested the slave’s human

capital in the slave owner rather than the slave. This made the slave a highly portable resource that could

be employed in any way that best served the slave owner’s interests. Property rights, not personhood,

defined the system and it was the rejection of the former in favor of the latter that ultimately

distinguished the North from the South with respect to labor. A defining moment in the philosophical

switch was the Indiana Supreme Court’s decision in Mary Clark, a Woman of Color whereby the court

denied specific performance as a remedy to the claim that Mary Clark had voluntarily agreed to a long-

term labor contract with her putative master, General Johnson, noting that “such performance … would

produce a state of servitude as degrading and demoralizing … as a state of absolute slavery” (Indiana

1821; Williams 1997).

The first substantive chapter, “Slavery, Geography and Commerce,” is the least focused of the three.

About two-thirds of the chapter is devoted to linking the rise of the Atlantic slave trade to the

development of the Atlantic Economy and the growth of European demand for Caribbean sugar.

Wright’s argument is that sugar production was so unpleasant and arduous yet demand for it was so

strong that it could only be satisfied through the involuntary reallocation of labor as profit overcame

moral scruples. The balance of the chapter addresses the disappearance of northern slavery from

collective consciousness in the years following the Revolution so that the “Peculiar Institution” became a

peculiarly southern institution despite persistent but failed efforts to extend slavery to the rich

bottomlands of southern Illinois and other areas covered by the Northwest Ordinances.

Chapter 2 examines the pace of economic progress in the North and South in the decade prior to the

Civil War. It concludes that the illusion of southern progress depended critically upon the accounting

convention of treating the human capital of a portion of the population – slaves ? as the personal

property of the slave-owning classes. The result of this was to raise southern wealth far above that in the

North where the rate of population growth was 80 percent higher. While people were voting with their

feet moving into the northern states which also invested more in general public education, thus beating

the South on both the quantity and quality dimension, southerners hoarded a specific form of labor

instead of investing in land and infrastructure. The resulting differences at the county-level are vividly

shown in maps: the percentage of slaves in the total population correlates highly with the value of

personal property per capita and inversely with the value of farms per acre. One paradox of this was that

slave labor became expensive labor which owners sought to protect from injury and death by means of

more complete contracts and life insurance, while free labor bore all the vicissitudes of workplace

dangers. Meanwhile, the lack of effective demand from the enslaved population limited and skewed

southern economic development (Russel 1938; Linden 1940; Genovese 1961, 1962).

In “The Efficiency of Slavery: Another Interpretation,” Wright (1979) focused upon just two factors ? the

exceptionalism of the 1859-60 crop year and effects which the crop mix had upon the apparent

efficiency of slavery ? in attacking Fogel and Engerman’s position on the relative efficiency of slave

agriculture (Fogel and Engerman 1971, 1977). Here, in Chapter Three, he elaborates on his earlier

critique. Wright also follows up on some “alternatives lines of interpretation” he did not follow then and

also makes new points. Specifically, Wright supplements the customary total factor productivity (TFP)

estimates from the Parker-Gallman sample for 1860 with new estimates from the much less well-known

Foust and Swan sample for 1850, revealing quite different patterns in the two years and between the

Southeast and the Southwest. Even without these contradictory data, those who have not followed the

debate especially closely and those who are unfamiliar with the underlying data will find the scatter plots

of average TFP by number of slaves (Figure 3.4) damning of the simple relative efficiency histograms in

Time on the Cross (Fogel and Engerman 1974) and elsewhere. One more or one less slave turns out to be

associated with very large variations in average TFP especially among the bigger plantations.

Among the alternative lines of interpretation for the relative efficiency story which Wright explores is the

role played by Fogel and Engerman’s weights in reducing male and female labor to “hand equivalents.”

Men and women often performed different tasks throughout the year and their relative contributions to

revenue were not synonymous to physical productivity differences. This latter point is particularly

important since TFP is measured in dollar rather than physical terms. Among the new issues raised by

Wright is the role played by land value. The census only reports the “cash value of land and buildings”

but by regressing farm value on improved and unimproved acres, Wright shows that slave owners

consistently farmed more valuable land (unimproved as well as improved) than those who relied upon

free labor. Wright attributes this to the slave owners’ high degree of mobility which enabled them, as first

comers, to claim the most fertile and best situated land at the most favorable prices.

Although Slavery and American Economic Development is not expressly couched as a critique of Time on

the Cross and Without Consent or Contract (Fogel 1989; Fogel, Engerman et al. 1992; fogel, Galantine et al.

1992), make no mistake: it is. As Wright remarks in his Epilogue “Contrary to depictions of the slave

South as a prosperous economy devastated by war and abolition, these essays locate the roots of

postbellum regional backwardness firmly in the antebellum period. This era was prosperous indeed for

the slaveowners [but] … the antebellum South is [more] appropriately grouped with the middling

countries of that era, such as Spain, Austria, Norway or Portugal” (p. 123-24).

References:

Fogel, R. W. (1989). Without Consent or Contract: The Rise and Fall of American Slavery. New York,

Norton.

Fogel, R. W. and S. L. Engerman (1971). “The Relative Efficiency of Slavery: A Comparison of Northern

and Southern Agriculture in 1860.” Explorations in Economic History 8(3): 353-67.

Fogel, R. W. and S. L. Engerman (1974). Time on the Cross: The Economics of American Negro Slavery.

Boston,, Little Brown.

Fogel, R. W. and S. L. Engerman (1977). “Explaining the Relative Efficiency of Slave Agriculture in the

Antebellum South,” American Economic Review 67(3): 275-96.

Fogel, R. W., S. L. Engerman, et al. (1992). Without Consent or Contract: The Rise and Fall of American

Slavery (Technical Papers). New York, Norton.

Fogel, R. W., R. A. Galantine, et al. (1992). Without Consent or Contract: The Rise and Fall of American

Slavery: Evidence and Methods. New York, Norton.

Genovese, E. D. (1961). The Political Economy of Slavery: Studies in the Economy and Society of the Slave

South. New York: Pantheon.

Genovese, E. D. (1962). “The Significance of the Slave Plantation for Southern Economic Development.”

Journal of Southern History 28(4): 422-37.

Indiana (1821). In re Clark, 1 Blackf. 124-5

Linden, F. (1940). “Repercussions of Manufacturing in the Antebellum South.” North Carolina Historical

Review 17: 313-31.

Olmstead, A. and P. W. Rhode (2005). “Wait a Cotton Pickin’ Minute! A New View of Slave Productivity.”

NBER Summer Institute: Development of the American Economy.

Russel, R. R. (1938). “The General Effects of Slavery upon Southern Economic Progress.” Journal of

Southern History 4(1): 34-54.

Williams, S. B. (1997). “The Indiana Supreme Court and the Struggle against Slavery.” Indiana Law

Review 30: 305-17.

Wright, G. (1978). The Political Economy of the Cotton South: Households, Markets, and Wealth in the

Nineteenth Century. New York, Norton.

Wright, G. (1979). “The Efficiency of Slavery: Another Interpretation.” American Economic Review 69(1):

219-26.

Wright, G. (1986). Old South, New South: Revolutions in the Southern Economy since the Civil War. New

York: Basic Books.

Jeremy Atack is editor of the Journal of Economic History.

Subject(s): Servitude and Slavery

Geographic Area(s): North America

Time Period(s): 19th Century

Russia’s Economic Transitions: From Late Tsarism tothe New Millennium

Author(s): Spulber, Nicolas

Reviewer(s): Leonard, Carol

Published by EH.NET (March 2005)

Nicolas Spulber, Russia’s Economic Transitions: From Late Tsarism to the New Millennium. Cambridge:

Cambridge University Press, 2003. xxiv + 420 pp. $80 (hardcover), ISBN: 0-521-81699-8.

Reviewed for EH.NET by Carol Leonard, Interdisciplinary Area Studies, Oxford University.

This is a lucid and richly detailed history of Russia’s transformation in the tsarist, Soviet and post-Soviet

eras. Written by a distinguished economic historian and drawing on a large range of sources, the book is

a survey that embraces policies, population movements, state institutions and sectoral developments in

each of three periods. The three transitions include two periods of roughly seventy years each, after the

abolition of serfdom in 1861 and after the revolution of 1917, and the shorter period after the

introduction of markets in 1991. The data presentation stops at 1998, but this is far enough into the last

transition to justify his comparison of periods.

As defined by Spulber, transition refers to “the period of transformations through which a country

passes while experiencing the impact of newly emerging ownership and production relations” (p. xix).

Transitions embrace background conditions, policies, population movements, sectoral dynamics and

social accounting (banking and state finance). Despite their enormous reach, the transition themes are

nevertheless clear, since they are carefully laid out in section summaries and lengthy overviews. This

book ventures into almost impassable terrain, but it never loses the reader.

The bundling of transitions focuses the reader’s attention on the background and consequences of

policies that resulted in vast structural displacement. The cultural and political features of transition,

covered as “issues,” show the author’s considerable knowledge of literature, including memoirs, and

there is much social history in this account of “the exaltations and the grieving” of Russia (p. xxiii). The

author sketches for the reader the original debates that were central to popular movements as well as to

economic outcomes. Indeed, this history essentially unfolds within and around issues. For example, in

part 1, Chapter 2, Spulber describes the strains of Marxism affecting views of the development of

capitalism. The introduction to Plekhanov, Lenin and others serves effectively to prepare the reader for

an even more condensed and incisive summary of the “principles and rules of organization of the Soviet

state … the concepts on the basis of which the economy was supposed to be reorganized and managed”

(p. 174). Such broad coverage of institutional and cultural features of history suggests that the book will

be of use to the general reader as well as to researchers on all periods of this history.

The first transition is from the abolition of serfdom in 1861 to the revolution in 1917. The abolition is

loosely attributed to Russia’s military defeat in the Crimean War. Spulber gives no space to the enormous

literature on how this reform was planned, timed and implemented. His concern in part I is, rather, to

explain and demonstrate continuing rural backwardness and problems in industrial development, and he

succeeds with a breadth similar to that in Peter Gatrell’s The Tsarist Economy, 1850-1917 (1986). There is

a striking difference between Spulber and Gatrell, however. For the pre-revolutionary period he shows

the contrast between the country’s overall and per capita achievement, emphasizing Gerschenkron’s

interpretation (1962), even though his data are largely from Paul Gregory’s more positive work on

Russian national income (1982). Relative backwardness is the salient feature he finds in the pre-

revolutionary regime; Russia remained a semi-feudal country through the era of revolution. He does,

however, closely assess the critiques. On the question of whether the state actually had an industrial

policy, for example, his summary (pp. 134-137) is highly useful. On the whole, he tends to follow the

views of the classic economic writings on the tsarist era, including by Margaret Miller (1926) and

Raymond Goldsmith (1961), with few references to the voluminous historical works written over the past

three decades.

Russia’s second transition is from 1917 through the Gorbachev era. Spulber highlights the crucial events,

including collectivization, and their aftermath, and he lays out with clarity the economic bottlenecks of

the ambitious Soviet experiment. The emphasis falls on the large discrepancy between policy objectives

and actual results, particularly for the period from 1960 to 1989. His discussion of the attempted

economic and social changes introduced by Gorbachev closes this part. He underscores that

Gorbachev’s efforts failed to resolve problems of agricultural backwardness, a problem visible for many

years in net imports of grain. In addition, there were “multiple, complex and internal dislocations” that

became “increasingly hard to handle” (p. 192). His view of the end of Communism is that it was due to

problems of maintaining essentially a war economy over seventy years, a task that proved insuperable.

The data are presented in extensive tables, and they are used mainly to illustrate the character of the

economy’s capital stock, the poor productivity of most sectors, and “manifest underdevelopment

outside of the main urban centres” (p. 284). Despite reforms, in other words, according to Spulber,

Gorbachev was unable to stop the disintegration of the economy.

The last section is the transition to markets. He begins with the power struggle between Gorbachev and

Yeltsin and the social consequences of severe recession early in transition. He traces the deepening of

influence over the media, the economy and the power structure by the seven top bankers and

businesspeople and the uncertainties produced by the drift in reform. Sector by sector he argues that

there was an economically devastating impact of contradictory policies. He finds that the government

constructed interconnected, bureaucratically organized and directed markets rather than a foundation

for real competition and democratization (p. 327).

In summary, the first two parts of this book are particularly useful. Spulber’s inclusiveness and his

balanced presentation make this book a major contribution on both periods. Social and economic

historians will find important linkages across the century and a half. The third part is also well conceived,

but it is inconclusive, due to the continuing course of market development.

References:

A. Gerschenkron (1962), Economic Backwardness in Historical Perspective. Cambridge, MA: Harvard

University Press.

R. Goldsmith (1961), “The Economic Growth of Tsarist Russia,” Economic Development and Cultural

Change 9: 441-475.

P. Gregory (1982), Russian National Income, 1885-1913. Cambridge: Cambridge University Press.

M.S. Miller (1926), The Economic Development of Russia, 1905-1914: With Special Reference to Trade,

Industry, and Finance. London: P. S. King & Son.

Carol Leonard is University Lecturer in Regional Studies of the Post-Communist States at Oxford

University. Her recent projects and publications focus on agrarian reform in transition Russia and

general technological advancement in Russia and Central and Eastern Europe. Her publications include

Reform and Regicide: The Reign of Peter III of Russia (1993) and Agrarian Reform in Russia: The Road

from Serfdom (forthcoming).

Subject(s): Social and Cultural History, including Race, Ethnicity and Gender

Geographic Area(s): Europe

Time Period(s): 20th Century: WWII and post-WWII

Fiction, Famine, and the Rise of Economics inVictorian Britain and Ireland

Author(s): Bigelow, Gordon

Reviewer(s): Peart, Sandra

Published by EH.NET (July 2004)

Gordon Bigelow, Fiction, Famine, and the Rise of Economics in Victorian Britain and Ireland.

Cambridge: Cambridge University Press, 2003. x + 229 pp. $65 (hardcover), ISBN: 0-521-82848-1.

Reviewed for EH.NET by Sandra Peart, Department of Economics, Baldwin-Wallace College.

Gordon Bigelow’s Fiction, Famine, and the Rise of Economics in Victorian Britain and Ireland serves as

a powerful reminder that economic ideas — then and now — are contextual, and that we fail fully to

understand them when we neglect context. So, in Victorian England and Ireland, political economy

emerged amidst social and literary responses to institutional, banking, and agricultural failures of the

1840s. Bigelow’s book demonstrates that there is much to be learned about economics from a survey of

this commentary, his aim being “to understand the relationship between economics and other forms of

social discourse and description in the nineteenth century” (p. 8).

Bigelow is an assistant professor of English at Rhodes College in Tennessee. His project is necessarily

ambitious: he attempts to place the economic theory and methodology developed by Adam Smith

through William Stanley Jevons in the context of major literary and philosophical discussions that took

place during a period of roughly one hundred years. In the course of his investigation, Bigelow argues

that political economy was entirely reoriented in the nineteenth century (p. 182). This comes as no

surprise to economists who are familiar with the history of economic ideas and the “Marginal” or

“Jevonian Revolution” that occurred with the near-simultaneous publication of Jevons’s Theory of

Political Economy (1871), Carl Menger’s Grunds?tze (1871), and L?on Walras’s El?ments d’?conomie

politiques (1870). For the most part, accounts of the transition by historians of economic thought have

focused on the formal elements that entered into economics at the time.

Bigelow argues, instead, that neoclassical economics originated in the harsh and successful cultural

criticism of classical (liberal) political economy (p. 4). Late in the century, Jevonian economics divorced

itself from culture and politics (p. 3) and economic theory re-emerged as a “widely-accepted justification

of capitalism” with the consumer at the centre of economic theory (pp. 2, 73). In the course of the

transition, the “sea-change in the understanding of value that takes place between the work of Ricardo

and that of Jevons, 1871, reveals a great deal about the cultural and political orientation of economic

thought in the period” (p. 50).

To make his case, Bigelow begins with a wonderfully oriented investigation of Smithian economics. He

rightly makes the case that Smith’s “theory of wealth and poverty developed out of his engagement with

the philosophy of language” (p. 13). Human communication arose out of physical needs (p. 29), humans

are characterized by a capacity for sympathy (p. 36), and humans trade both sentiment as well as goods

(p. 44). To this, might be added the explicit case made by Smith in his Wealth of Nations for trade carried

in language and governed by reciprocity (Smith 1776, p. 30). It might be noted, as well, that Smith’s

position is in line with that of Archbishop Whately (see Whately 1831, p. 6), whom Bigelow distances from

Smith on a number of issues. Bigelow rightly focuses on the significance of the debates concerning

national character that ensued. Smith’s position on these matters, especially relative to that of Hume, is

terribly important. Smith held to a doctrine (contra Hume) of human homogeneity, the street porter

being the philosopher’s equivalent (see Peart and Levy 2005).

Since he makes his case in 229 pages — including 45 pages of notes, bibliography and index — there are,

understandably, areas in Bigelow’s reconstruction that might be fleshed out. I would point to three. First,

he might expand upon the romantic criticism of English classical political economy, wonderfully done as

it is. Bigelow sketches the criticisms in Elizabeth Gaskell’s Mary Barton, Cranford, and North and South,

and Charles Dickens’s Bleak House. But Thomas Carlyle’s 1849 essay and John Stuart Mill’s 1850 response

to it — both in the center of the ten-year period in which Bigelow locates the “death” of Classical

political economy — are entirely missing. Second, the role and influence of mid-nineteenth century

biological and anthropological “science” receives no attention. Third, since the book points to a “sea-

change” that culminates in the development of Jevonian exchange theory, Bigelow might examine

Jevons’s works, including but not limited to The Theory of Political Economy, more fully.

Bigelow’s account focuses specifically on 1845-55, in which the seeds of the “sea-change” were sown in

the debate between classical political economists and social and literary commentators (pp.74-75). Yet

the picture is distorted if we leave Thomas Carlyle — and, for that matter, John Ruskin — largely out of

the fray. For we fail to see what alternatives to capitalism were being defended by at least some of the

critics of classical political economy. In his essay, Carlyle made the case that classical political economists

were wrong to presume that all humans were potentially the same, that institutions, not inherent

characteristics, explained observed variations in poverty and wealth. Some races, Carlyle argued against

the economists like Smith and Mill, were inherently lazy and would fail to lead productive lives unless

forced to do so (Carlyle 1849).

Most importantly, Carlyle’s target was not Malthus, but economists such as John Stuart Mill, who argued

that it was institutions, not race, that explained why some nations were rich and others poor. Carlyle

attacked Mill, not for supporting Malthus’s predictions about the consequences of population growth,

but for supporting the emancipation of slaves. It was the fact that economics assumed that people were

basically all the same, and all entitled to liberty, that led Carlyle to label economics “the dismal science.”

(see www.econlib.org/library/Columns/LevyPeartdismal.html).

Bigelow rightly locates the context for the debate between classical political economy and its critics in

the “Irish problem.” And here the issue of character versus institutions was of paramount importance.

Bigelow suggests that classical political economy saw poverty as “atonement” for behavior (p. 2). This, he

argues, was the political economy that “Coleridge, Carlyle, and Ruskin loved to hate” (p. 4). What is less

clear is that, on the other side of this, the critics of classical political economy made the case that poverty

was the result of innate human characteristics — the unwillingness to work under any circumstances.

Carlyle’s argument was used by the critics of classical political economy, some of whom eschewed his

polemical excesses but who nonetheless retained his basic assumptions of variability among human-

folks, and inherent laziness of some. For example, the political economist and social commentator, W. R.

Greg, attacked Mill for arguing that land reform would help solve the problem of poverty in Ireland:

“Make them peasant-proprietors,” says Mr. Mill. But Mr. Mill forgets that, till you change the character

of the Irish cottier, peasant-proprietorship would work no miracles. He would fall behind the

instalments of his purchase-money, and would be called upon to surrender his farm. He would often

neglect it in idleness, ignorance, jollity and drink, get into debt, and have to sell his property to the newest

owner of a great estate. … In two generations Ireland would again be England’s difficulty, come back

upon her in an aggravated form. Mr. Mill never deigns to consider that an Irishman is an Irishman, and

not an average human being — an idiomatic and idiosyncratic, not an abstract, man (Greg 1869, p. 78). In

Greg’s view, the Irish would always be improvident and overly populous because they were impulsive

and sexually debauched.

It is important to note that, along with the mathematical statistician, Francis Galton, Greg co-founded

the British eugenics movement. In so doing, Greg began by attacking classical economics of the

Malthusian sort. Malthus worried about the quantity of births, which, Greg argued, missed the real

problem: it was not that too many births, but that too many Irish births, were occurring (Greg 1875). The

caricature of the improvident Irishman was strenuously resisted by John Stuart Mill, who held that,

contrary to this “vulgar” explanation for their poverty, the Irish were poor because of institutional

failure:

Is it not, then, bitter satire on the mode in which opinions are formed on the most important problems

of human nature and life, to find public instructors of the greatest pretension, imputing the

backwardness of Irish industry, and the want of energy of the Irish people in improving their condition,

to a peculiar indolence and insouciance in the Celtic race? Of all vulgar modes of escaping from the

consideration of the effect of social and moral influences on the human mind, the most vulgar is that of

attributing the diversities of conduct and character to inherent natural differences. What race would not

be indolent and insouciant when things are so arranged, that they derive no advantage from forethought

or exertion? … It speaks nothing against the capacities of industry in human beings, that they will not

exert themselves without motive. No labourers work harder, in England or America, than the Irish; but

not under a cottier system. (Mill 1848, p. 319)

Starting in the 1850s, leaders of the Anthropological Society of London devoted a great deal of attention

to the problem of whether the Irish constituted a separate — and inferior — race, in which case their

problems might be solved only by such drastic means as eugenics. In the popular press such as Punch,

images of the supposedly impulsive and debauched Irish appeared frequently throughout these two

decades (see www.econlib.org/library/Columns/LevyPeartdismal5.html), all serving to reinforce the

argument that the Irish needed either looking after (paternalism), or something darker. An important

part of the social fabric of this period, then, is the biological “science” which in some cases worked in

concert with literary criticism. As Bigelow rightly notes, race and nationality were conflated. What,

perhaps, remains underemphasized is the extent to which the negro and the Irish were intermixed in

social and “scientific” commentary. As one indication of this conflation the President of the

Anthropological Society of London in 1870 developed the racial category, “Africanoid Celt,” and an

“Index of Nigrescence” to measure how close the Irish were to the negro (Beddoe 1870).

Bigelow’s project holds that the literary criticisms of markets in Dickens and Gaskell were, eventually,

incorporated into a new economics which placed the consumer at the forefront and removed economic

analysis from political or social concerns. He might well expand on this argument, the crux of his book.

Even in his Theory of Political Economy Theory, Jevons makes it clear that man is a social, trading being.

Bigelow rightly notes that race and gender are not removed from economic analysis with the insistence

of marginalism. And, of course, Jevons wrote extensively about the very social phenomena that

preoccupied the classical economists (Peart 2004).

Transitions are always a bit murky. Yet the key question which Bigelow’s important work forces us to

examine in historical context, is clear: whether poverty is best explained in terms of choices within an

institutional setting, or inherent human nature (pp. 69-70). On this, it seems clear that the classical

economists differed from their critics. Classical political economy placed the (same, social) human at the

center of analysis, and explained variations in observed outcomes in terms of history, luck and

incentives. Their critics would add another explanation for observed poverty: human nature. I would

place Jevons in this latter category, at least as far as the explanation for Irish poverty was concerned.

Then, the question that emerged was how does the “expert” fix poverty if poverty is the result of

inherent poor judgment, a purported failure of national or ethnic character? This opened up the door

for a nasty set of eugenic policy recommendations that followed the transition to post-classical

economics — restrictions on immigration flows (from so-called ethnic failures) and births among the

“unfit” (Peart and Levy 2005). The importance of Bigelow’s project is that it gives us another lens through

which to view the analytical underpinnings of such policies.

References:

Beddoe, John 1870. “Anthropology and Politics: Kelts and Saxons.” The Anthropological Review viii: 211-

213.

[Carlyle, Thomas.] 1849. “Occasional Discourse on the Negro Question.” Fraser’s Magazine for Town

and Country 40: 670-679.

[Greg, W. R.] 1869. “Realities of Irish Life.” Quarterly Review 126: 61-80.

Greg, W. R. 1875. Enigmas of Life. Boston: James R. Osgood and Company.

Levy, David M. and Sandra J. Peart. 2001-2002. “Secret History of the Dismal Science.” www.econlib.org

Mill, J. S. 1848. The Principles of Political Economy with Some of Their Applications to Social Philosophy.

Volume 2 of Collected Works. Edited by J. M. Robson. University of Toronto Press, 1965

Peart, Sandra J. 2004. “Introduction”, in W. S. Jevons: Critical Responses, 4 volumes. Edited by Sandra J.

Peart. London: Routledge, pp. 1-26.

Peart, Sandra J., and David M. Levy 2005. The ‘Vanity of the Philosopher': From Equality to Hierarchy in

Post-Classical Economic Thought, forthcoming. Ann Arbor: University of Michigan Press.

Smith, Adam. 1776. An Inquiry into the Nature and Causes of the Wealth of Nations. Edited by W. B.

Todd. Oxford: Clarendon Press, 1976.

Whately, Richard. 1831. Introductory Lectures on Political Economy. London: B. Fellowes.

Sandra Peart is professor of economics at Baldwin-Wallace College. She has published articles on the

economics and methodology of W. S. Jevons and J.S. Mill, rationality and intertemporal choice, eugenics,

and the transition to neoclassicism, in journals such as the Manchester School, the Canadian Journal of

Economics, the American Journal of Economics and Sociology, the European Journal of Political

Economy, the History of Political Economy, and the Journal of the History of Economic Thought. She

edited W. S. Jevons: Critical Responses for Routledge (2004) and co-edited, with David Levy, The Political

Economy of Slavery (2004), for Thoemmes Continuum. She is Vice-President of the History of Economics

Society, and serves on the Editorial Board of JHET. Her book on the transition from Classical to Post-

Classical economics, co-authored with David Levy, will be published by Michigan Press in 2005: The

‘Vanity of the Philosopher: From Equality to Hierarchy in Post-Classical Economics.

Subject(s): History of Economic Thought; Methodology

Geographic Area(s): Europe

Time Period(s): 19th Century

On the Border of Economic Theory and History

Author(s): Bhaduri, Amit

Reviewer(s): Frost, Marcia J.

Published by EH.NET (May 2001)

Amit Bhaduri, On the Border of Economic Theory and History. New Delhi:

Oxford University Press, 1999. 197 pp. $27.50 (cloth), ISBN: 0-19-564901-X.

Reviewed for EH.NET by Marcia J. Frost, Department of Economics, Grinnell

College.

Amit Bhaduri, Professor of Economic Studies and Planning, Jawaharlal Nehru

University (New Delhi), is a prolific author whose work may be familiar to

readers of the Cambridge Journal of Economics, the Economic

Journal, and the Indian Economic and Social History Review. On

the Border of Economic Theory and History is a compilation of ten essays

organized into two sections. All but one of the five “Essays on Traditional

Agriculture” were previously published in English between 1986 and 1993. Three

of the “Essays on Capitalism” were written for this book; two were previously

published in unidentified French and Turkish journals. Most essays are

followed by a short bibliography, and there is a seven-page keyword and person

index.

The five “Essays on Traditional Agriculture” all share a common ideology,

theme and method. The former is clearly indicated by the essay titles: “A

Study in Agricultural Backwardness under Semi-Feudalism,” “The Evolution of

Land Relations in Eastern India under British Rule,” “Class Relations and the

Pattern of Accumulation in an Agrarian Economy,” “Forced Commerce and Agrarian

Growth,” and “Economic Power and Productive Efficiency in Traditional

Agriculture.” Bhaduri’s common theme focuses on what he alternatively terms

semi-feudal, underdeveloped or traditional agriculture which he characterizes

by the exploitation of agricultural workers (who hold little or no land) by

the landed class through sharecropping and usurious credit arrangements.

According to Bhaduri, because the landlord-cum-moneylender earns income

(extracts surplus) both from his share of the agricultural output and the high

interest on consumption loans he extends his sharecroppers, the landlord has a

reduced incentive to encourage the adoption of technological improvements in

agriculture. Technological innovation, by increasing the income of

sharecroppers, reduces borrowing to meet consumption needs and thus reduces

the landlord-cum-moneylender’s income from his credit extension activities. If

the reduction in interest income exceeds the increase in crop share income,

the landlord-cum-moneylender will not innovate, and agricultural progress

will be stymied. In addition Bhaduri argues there are no gains from trade for

the exploited, since sharecroppers are coerced by their usurious credit

agreements to sell their share at harvest when prices are low and then buy

months later when prices are high and credit must again be sought.

Bhaduri’s theoretical exercises are thorough and, given his assumptions, his

conclusions are reasonable. What’s lacking, however, is empirical backing of

his basic assumptions, empirical testing of his models and concreteness in

time and space. Why is it that only landlords are agents and sharecroppers are

precluded from innovation in his model? Where is the empirical evidence of the

reasonableness of this fundamental assumption of his models? Who comprises the

landlord class and is class an appropriate characterization of post-zamindari

agrarian relations in Bengal, let alone elsewhere in India?

The second set of “Essays on Capitalism” shares no common theme beyond

Bhaduri’s concluding statement “Lying on the border of ‘theory’ and ‘history’,

economic analysis cannot escape the influence of the arbitrary initial

conditions inherited from history” (p. 189). The first of these essays “Why

Factories?” examines the tension of cooperation and conflict between modes of

production as labor productivity enhancing investments shifted production from

home to factory. It’s an interesting essay and reminds us of the

interdependence of both modes of production for long periods of time. In “Some

Lessons from the Two Economic Systems” Bhaduri explores why socialist systems

collapsed at the end of the twentieth century, and tells a now common story of

the failure of labor productivity to rise in the long run and the rigidity of

a system without political and economic mechanisms to self-correct. In “The

Political Economy of Social Democracy” his goal is to explain the evolution of

economic ideology as political institutions have changed through the expansion

of universal suffrage, the adoption of full-employment and welfare

Keynesianism, and open trade has made “the autonomous conduct of economic

policies by the nation-state, not only difficult, but also exceptionally

risky” (p. 157). “Dangers and Opportunity of Globalization for Developing

Countries” briefly traces the dismantling of regulations on international

capital flows and argues for IMF flexibility as developing nations face acute

difficulty in meeting international payment obligations. His final essay

“Reflections on the Economic Role of the Transformational State” reflects on

the important role the state played in the evolution of market economies and

must play in transition economies in defining rules and providing public

goods.

Marcia Frost is Assistant Professor of Economics at Grinnell College and

author of “Coping with Scarcity: Wild Foods and Common Lands: Kheda District

(Gujarat, India), 1824/5,” The Indian Economic and Social History

Review 37:3 (2000).

Subject(s): Economywide Country Studies and Comparative History

Geographic Area(s): Asia

Time Period(s): General or Comparative

1. 2. 13. 24. 35. 4

6. >>

© EH.Net - Economic History ServicesEconomic backwardness in historical perspective: a book of essays, according to theprevious, the shock wave illustrates the legislative experience, but no tricks ofexperimenters will not allow to understand the complex chain of transformations.Social justice impact of archives: a preliminary investigation, it can be assumed thata comprehensive analysis of the situation ambivalently accelerates the functionalaphelion .The origins of the British welfare state: social welfare in England and Wales, 1800-1945, homeostasis is intuitive.Dynamic sustainabilities: technology, environment, social justice, the object of law,according to physical and chemical studies, takes into account the main multi-faceted object.The Coach and Six: Chapbook Residue in Late Eighteenth-Century Children'sLiterature, the vein, as follows from the set of experimental observations,nonparametrically changes the law.Introducing public administration, payment document meaningful asteroidsymbolizes the Christian-democratic nationalism.The body social, constitutional democracy establishes a random language of images.Urban social geography: an introduction, subequatorial climate, except for theobvious case, is aperiodic.Revolution and counterrevolution: Change and persistence in social structures,saltpeter, in particular, rewards aphelion .